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Article / 27 January 2017 at 10:04 GMT

Earnings Watch: US technology giants enter the arena

Head of Equity Strategy / Saxo Bank
Denmark
  • Apple struggling to compete with Chinese competitors on customer value
  • Facebook's newsfeed ad revenue hits a wall, investors look at other sectors
  • Amazon's cloud storage offerings providing strong returns
amazon
The Amazon "everything machine" has defied its critics  and maintained 
more than healthy profit margins. Photo: Shutterstock

Next week is the busiest week in terms of global earnings with 327 companies reporting earnings. In this week's earnings preview we zoom in on the three most important earnings releases from Apple, Facebook, and Amazon.

Apple still lost in translation?

Analysts have lifted EPS estimates 4% over the past six months reflecting rising expectations. Consensus is looking for $77.4 billion in financial year 2017 Q1 revenue up 3% year-over-year, but only $25.3 bn in EBITDA, down 5% y/y. Apple reports its Q1 results on Tuesday at 2130 GMT (after market close).

The risks for investors are the stronger USD and weakness in the Asia-Pacific and Americas geographical segments which were both weak in fourth quarter of the 2016 financial year. China in particular is a growing pain for Apple, which is losing its market share due to its iPhone having too high a price point to increase volume in a market that is very price-sensitive. 

Additionally, Chinese smartphone manufacturers have increased quality dramatically at a significantly lower cost than the iPhone. This will be the most relevant focus 

Apple weekly share price
Apple share price Source: Saxo Bank

While the valuation is not elevated with trailing EV/EBITDA at 7x – or around a 47% discount to the S&P 500 – it also reflects below average growth rates in the future. So there is naturally a significant upside potential should Apple be able to lift the outlook.

Can Facebook resume to growth euphoria?

Facebook, the epicenter of growth, disappointed back in November when the company released its Q3 earnings, revising down its growth forecasts as the social network approaches its maximum capacity for ads served in its newsfeed. Further increases in ads would deteriorate user experience, jeopardizing the brand and user retention. The market reacted swiftly, pushing down the share price by 6%. However, the share price has come back to all-time-high levels as investors have come to the conclusion that Facebook is still one of the few places of high future growth.

Facebook weekly share price
Facebook share price

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Source: Saxo Bank

Consensus is expecting Q4 revenue at $8.5 bn, up 46% y/y and EBITDA at $5.5 bn, up 79% y/y. Where else do we see this growth? Not many places, and that is why Facebook remains an investor favourite despite being valued at around 100% premium to its S&P 500 valuation. Buton the other hand, S&P 500 companies are almost not growing, so in our view the valuation can be justified. Facebook reports Q4 earnings on Wednesday at 2105 GMT (after market close).

With the Facebook network reaching maximum capacity, investors will focus on future outlook for ads served on Instagram, WhatsApp and the Messenger platform because that's where growth will come from over the next five years. The whole VR (virtual reality) and gaming endeavour with Oculus will not deliver significant growth for the foreseeable future, but it sets Facebook up for being part of the future growth in the VR space. 

Will the everything machine deliver again?

Despite reaching revenue of $128 bn, the growth rate does not seem to decay at Amazon as Jeff Bezos' everything machine eats the competition's lunch. The previous critique of Amazon's lacking profit margins has disappeared as the AWS (Amazon Web Services) business has caused an explosion in the EBITDA margin from 4% in 2011 to an expected 11.1% in 2016. With AWS growing at around 55% y/y and being 10% of the overall Amazon business with very attractive EBITDA margins, the cloud infrastructure business will continue support investor optimism.

Amazon weekly share price:
Amazon share price Source: Saxo Bank

Consensus is expecting Q4 revenue at $44.6 bn, up 25% y/y and EBITDA at $4.2 bn, up 47% y/y. In the last eight quarterly earnings releases the company has exceeded revenue expectations six times. Investors will focus on AWS, Amazon's core business in e-commerce but also any hints on the outlook for Amazon Go – a new physical supermarket with no traditional cashier payment. Amazon reports Q4 earnings on Thursday at 2101 GMT (after market close).

Other important earnings releases next are highlighted in the table below.

Earnings watch list Source: Bloomberg and Saxo Bank 

— Edited by Jack Davies

Peter Garnry is head of equity strategy at Saxo Bank

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