Alphabet, Microsoft Lead Bear-Market Earnings Season

(Bloomberg) — Investors are facing a make-or-break week for some of Wall Street’s most influential tech stocks in a historic year for the group marked by a plunge into bear market territory.

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The superlatives have followed one after another in 2022’s wild ride. Shares of Meta Platforms Inc. have lost 61%, their biggest drop since the company went public a decade ago. Apple Inc., Alphabet Inc., Amazon.com Inc. and Microsoft Corp. are set for their steepest declines since the global financial crisis.

The Nasdaq 100 Index rose 0.6% on Tuesday.

Now, these companies are slated to report quarterly results this week with projections showing a profit decline by the most in at least three years. The quintet of stocks together comprised about 40% of the weight of the Nasdaq 100 Index, which has lost $6 trillion of value this year because of supersized interest rate hikes from the Federal Reserve and the growing potential of a recession.

“They are essential to the sentiment around tech, no doubt,” said Neil Campling, an analyst at Mirabaud Securities. “Investors are now focused on the bottom line and want evidence of lower costs, disciplined spending, and not chasing revenue growth at all costs.”

Here’s a look at the Big Tech stocks slated to report this week and what investors are keeping an eye on.

Alphabet

Investors are concerned about the strength of the ad market in a weaker economy, a theme that was underlined by weak growth out of Snap Inc. last week. However, analysts are still penciling in full-year revenue growth for Alphabet of about 12%, slightly faster than the S&P 500, with double-digit increases also expected for the next three years.

Any sign after the market closes Tuesday that those forecasts are too optimistic could send the stock on another leg down. Keybanc Capital Markets on Monday lowered its estimates for the Google parent, and is now predicting a revenue increase of only 5% for the year.

The stock weakness arguably has made Alphabet a bargain, as it trades at just 17 times estimated earnings, a discount to its 10-year average and the Nasdaq 100 overall.

Microsoft

The software giant, which also reports after the close Tuesday, trades at 23 times earnings, a slight premium to its average over the past decade.

While demand for its cloud and business software products is expected to be durable, even in the event of a recession, the 9.4% quarterly revenue growth expected by analysts would be its slowest pace since 2017.

“The big question mark is, what impact will Microsoft see from the economy slowing and PC weakness?” Wiley Angell, chief market strategist at Ziegler Capital Management. “However, given the overall stability of the revenue and the stock’s valuation, I think this is a good time to be evaluating it.”

Meta Platforms

After a stock plunge that’s wiped $579 billion off Meta’s value this year, some investors would love to hear Mark Zuckerberg announce at Wednesday’s earnings that he’s dialing back the spending on the company’s push into the metaverse. That expensive gambit has yet to generate meaningful revenue at a time when investors are focused on reducing costs.

The Facebook parent has been besieged by stalling user growth, competition from TikTok, and an Apple privacy policy that has diminished its ability to target ads. Also, it’s facing the same weak ad market that pressured Snap.

Full-year revenue for is seen falling 0.7%, making it the only company of the five expected to report a decline. This is also set to be the first year of falling revenue in the company’s history. Meta stock trades near its cheapest level on record, though that hasn’t been enough to entice bulls.

Amazon.com

Amazon reports Thursday afternoon, and the report will be scrutinized as a bellwether across industries. The e-commerce business will shed light into the strength of the consumer, especially going into the holiday shopping season, while its Amazon Web Services cloud-computing division gives a glimpse into how IT spending is holding up.

Investors are likely to focus on the progress Amazon is making cutting costs, given the recent preference for profitability over growth. Amazon trades above 40 times estimated earnings, more than twice the Nasdaq 100, though below its long-term average.

Amazon is JPMorgan Chase & Co.’s top idea among internet stocks, and it views the valuation as attractive. While analyst Doug Anmuth sees some risks — including currency headwinds and slowing discretionary spending — he writes that it “becomes a cleaner story through 2022 as revenue growth re-accelerates & operating income margins expand into 2023.”

Apple

The iPhone maker has been the relative winner of 2022, down 15%. Investors have gravitated to it as its steady growth and fortress-strength balance sheet give it a perceived safe-haven status.

However, this could leave the stock vulnerable when it reports on Thursday. Bloomberg News recently reported that it is retreating from plans to increase production of its new iPhones given demand trends. The stock also trades at 23 times forward earnings, above both its long-term average and the market overall.

“Apple certainly doesn’t look like it is being priced for a recession, and the multiple could be challenged in the short term, given what we’re hearing about softness in the market,” said Angell. “However, the stability of earnings should continue to result in stability in the stock, while providing a higher floor for the multiple.”

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  • Apple increased prices for its music and TV+ services for the first time, citing rising licensing costs, a move that risks giving rivals an edge in a fiercely competitive streaming industry.

  • WhatsApp, the instant messaging service owned by Meta Platforms Inc. said it fixed an issue that caused a widespread outage, with tens of thousands of users reporting problems.

  • Amazon workers seeking to join a union at a company warehouse in Southern California have backed away from their attempt to hold an election, a setback for the upstart Amazon Labor Union following its defeat at a New York facility last week.

  • The US unsealed charges claiming two Chinese intelligence officers tried to obstruct a criminal investigation of Huawei Technologies Co., and alleged others were working on behalf of a “foreign power” to try procure technology and recruit spies.

  • SoftBank Group Corp.-backed Jellysmack, which helps content creators become YouTube and TikTok stars, is launching a spending spree for growth in Asia, following staff cuts this year.

–With assistance from Subrat Patnaik.

(Updates to market open.)

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