- Alphabet missed earnings and revenue as the digital advertising market is hit with a slowdown.
- Microsoft reported a strong quarter despite the early preannounced warning from management.
- Meta Platforms had strong platform results but management’s expense binge is not slowing down as they look to spend $39 billion in FY2023.
- Avnet Inc. reported a strong quarter and has all the growth aspects of a long-term hold.
- Apple reported a solid quarter as results came in better than feared and management is navigating a tough environment well.
2022 Q3 earnings in the technology sector have been a mixed bag with a significant slowdown coming in the digital advertising market as economic activity slowed from raised interest rates. Despite the slowing high-flying technology names, Microsoft and Apple Inc. reported solid quarters as enterprise & retail consumers stayed steady. The electronic distributor, Avnet remains a standout small-cap growth name with a blowout a quarter from the company.
Alphabet Inc. (GOOGL): The parent company of Google Inc. reported earnings of $1.06/share (missed WallStreet consensus by $0.19) and revenue of $69.09 billion (missed WallStreet consensus by $1.56 billion). In comparison to our fund estimates, Alphabet missed headline earnings as we estimated the technology giant would earn $1.32/share on $69.95 billion. The technology company reported revenue growth of 6% as 5% was eaten up by the strong U.S. dollar. The search business segment held up well while Google Cloud reported explosive growth of 37.6%.
Looking at the revenue segments in more detail, the Cloud business exceeded our fund estimates generating $6.87 billion (versus our estimate of $6.72 billion) while the Advertising and YouTube segments missed our estimates of $57.5 billion and $7.73 billion respectively as they generated $54.48 billion and $7.07 billion respectively. Operating income was down 18.5% because of the high expenses coming from the Cloud business segment and the headcount rose by 36,000 employees over the past year. Alphabet generated $16.1 billion in free cash flow down from $18.7 billion and had a net cash increase of $4.1 billion (raised $43 billion from investments & debt issuances).
The company’s stock sold off on the headline misses on the earnings and revenue numbers. The Advertising and YouTube businesses showed some signs of softness which was not greeted well by investors. Despite the stock sell-off, we continue to like the stock even at these prices and we have been adding to our position.
Microsoft Inc (MSFT): The enterprise-focused technology company reported earnings of $2.35/share (beat WallStreet estimates by $0.06) and revenue of $50.1 billion (beat WallStreet estimates by $410 million). These numbers came in better than expected in comparison to our fund estimates which estimated the company would earn $2.34/share on $49.7 billion of revenue. Despite the preannouncement from management about the strong U.S. dollar headwind, Microsoft still delivered an incredible revenue number with growth up 11%. The strong U.S. dollar was responsible for eating up 5% of the revenue growth.
The Cloud business was the main revenue driver for Microsoft with year-over-year revenue growth of 20% while the Enterprise segment was up 9%. Azure was up 35% reporting revenue of $20.3 billion and this came in below our expectation of $22 billion. Management noted that the PC industry still remains weak reporting a revenue decline of 3% and even Gaming was down 3%. Gross Profit declined but stayed intact at 69.2% down from 69.8% a year ago which was a slight miss. Microsoft produced $16.9 billion in free cash flow down from $18.7 billion a year ago. The net cash did increase by $8.9 billion during the quarter as the company sold some investments.
The 2023 outlook was very cautious from management as the PC & Gaming businesses continue to slow. The economic slowdown coming in 2023 is going to weigh on the stock but we continue to add to our Microsoft position. We continue to hold the name which still trades a fairly loft valuation of 25 times earnings.
Meta Platforms Inc. (META): The social media giant reported earnings of $1.64/share (missed WallStreet estimates by $0.22) and revenue of $27.71 billion (beat WallStreet estimates by $310 million). In comparison to our fund estimates, Meta Platforms beat on revenue and missed on earnings with the higher expense spend aimed at the Metaverse. We estimated Meta Platforms would earn $1.87/share on $27.4 billion of revenue. The company’s revenue declined by 4% due to the digital advertising market slowing down. Expenses were up 4% as the spending pivoted towards the Metaverse Platform. Operating margins declined from 36% to 20% as Meta Platforms Inc. faced headwinds of inflation.
The platform metrics for Meta Platforms were good given the headwinds and how sentiment around Instagram, Messenger, and Whatsapp is negative it was very surprising. The average revenue per user (ARPU) came in at $9.41 which came in ahead of our estimate of $8.89. Daily and monthly active users came in ahead of estimates of 1.97 billion and 2.94 billion with 1.98 billion and 2.96 billion respectively. As of the end of Q3, the company’s headcount was up 28% to 87,314 and management signaled a hiring freeze until the end of the fiscal year 2023. The outlook had some operational changes as management reduced its full fiscal year 2022 expenditure as they slow the spending binge.
However, the 2023 expense guidance from management was a bit disappointing from management that is meant to reign in expenses. Management expects to spend $39 billion on Data Centers, Network Infrastructure, and Artificial Intelligence. Overall, this was a kitchen-sink quarter from management as the stock capitulated below $100/share. We think the stock is basing now and is one or two quarters away from turning if management does a bit of expense control.
Avnet Inc. (AVT): The electronic component distributor reported earnings of $2/share (beat WallStreet estimates by $0.09) and revenue of $6.75 billion (beat WallStreet estimates by $390 million). Avnet beat estimates handily as we expected the company to earn $1.95/share on revenue of $6.40 billion. The company delivered solid revenue growth with 21% year-over-year growth and 8% was eaten by the strong U.S. dollar. Electronic components were up 23% while the Farnell division had a sales decline of 6.4%. Asia is still the strongest region geographically with $2.94 billion.
Avnet’s operating margins were up 4.3% overall and it seems like management has better expense controls as they integrate their acquisition. The company had a cash burn of $673.4 million up from a burn of $43 million. Despite the cash burn, Avnet returned $175 million back to shareholders in the form of dividends and share repurchases. Management’s outlook was good and in line with what we expected as they factored in a $60 million headwinds from the strong U.S. dollar. This was a solid quarter from Avnet and it is my favorite small-cap growth company with a solid dividend yield of 2.9%. We think the stock has room to run to $45/share (5.38% upside from the current price on November 9, 2022).
Apple Inc. (AAPL): The iPhone maker reported earnings of $1.29/share (beat WallStreet estimates by $0.02) and revenue of $90.2 billion (beat WallStreet estimates by $1.38 billion). In comparison to our fund estimates, Apple exceeded our expectations of earnings of $1.30/share on revenue of $88.9 billion. Apple reported revenue growth of 8% as the company generated $394.3 billion up from FY 2021. The services segment of the company generated $19.2 billion and it came in way short of our fund estimate of $20.6 billion. The iPhone segment generated $42.6 billion during the quarter which came in ahead of our estimate of $41.3 billion. China had revenue growth of 6% which was better than feared given the COVID-19 shutdowns during the quarter.
Along with the revenue numbers, the company expanded its gross margins by 30 basis points to 42.3% despite being in an inflationary environment. The gross margin expansion shows the excellent execution of Tim Cook and co. The research & development expense category was up 17% from a year ago as the company continues to invest and develop its products. The company generated $24 billion in operating cash flow and returned $29 billion to shareholders. Management declared a quarterly dividend of $0.23/share while still holding a cash balance of $48.3 billion. The stock reacted well to the earnings report from Apple and despite being a difficult quarter management executed well. Apple continues to be a core holding for our fund and we continue to add to our stock position.
Disclosure: Cresco Investments is long Alphabet Inc. (GOOGL), Microsoft (MSFT), Meta Platforms (META), Avnet (AVT), and Apple Inc. (AAPL).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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