Tech earnings: What to look out for in a bumper day of Silicon Valley results
All eyes will be on Silicon Valley tonight as the tech giants prepare to unveil their earnings for the third quarter.
Google owner Alphabet, Amazon, Apple, Facebook and Twitter are all set to update investors on their trading during a turbulent period dominated by the coronavirus crisis.
Earnings season for the so-called FAANG companies kicked off last week with Netflix, which boosted revenue but fell short on subscriber numbers.
The market capitalisation of the FAANG firms has soared $2.2 trillion (or 63 per cent) over the last year, with the shift to home working helping to boost demand for tech products and services.
Russ Mould, investment director at AJ Bell, warns results won’t be “quite so stellar” in the second half of the year, but says the quarterly figures could contain some positive earnings surprises and forecast upgrades.
Alphabet
While tech firms have fared relatively well during the pandemic, they are not immune to the impact of Covid-19.
Alphabet, which owns Google and Youtube, suffered a decline in advertising revenue in the second quarter as businesses cut spend to shore up their finances.
“The biggest question is whether advertising in Google search and Youtube has recovered to pre-Covid-19 levels, or if it is still suffering in the pandemic,” says Martin Garner, chief operating officer of CCS Insight.
Tom Johnson, chief transformation officer at Mindshare, says Google Cloud will also be a key indicator of progress.
“Whilst search advertising is still the main driver of revenues for Google, the battle to become the infrastructure of the next wave of digital business is the next big opportunity.”
Google has been pumping more money into its so-called Other Bets ventures and, with a new antitrust case probing its search business, the company may be looking to new avenues.
Amazon
Amazon has been one of the undisputed winners of the Covid-19 crisis, benefitting from a huge rise in online shopping and increased demand for its Prime streaming service.
Hilding Anderson, head of retail strategy for the Americas at Publicis Sapient, forecasts “new records” for Amazon, with revenue of more than $100bn for the quarter.
“The ecommerce giant is set up for success this holiday season as physical stores will be less important than ever before; stores are no longer the core for a vibrant retail business as they once were,” he says.
“With a third wave of Covid in many places, it’s probable that more consumers will stay at home and further the shift towards online shopping.”
Amazon Web Services, which provides cloud computing, suffered lower growth in the second quarter as budget cuts from some customers offset the ongoing shift towards cloud services.
CCS Insight’s Garner says he expects a “balanced” view from AWS as these trends continue in the third quarter.
Apple
The major focus for Apple will be the release of the iPhone 12, which was launched this month after a delay caused by the coronavirus crisis.
Geoff Blaber, vice president of research for the Americas at CCS Insight, forecasts continued growth from previous quarters, boosted by work-from-home demand for Macs and iPads.
But he says this will be overshadowed by fourth-quarter forecasts, which will give the mark a hint of expectations for the latest iPhone model.
“We believe there is pent-up demand for upgrades, and many consumers whose jobs have not been damaged by the pandemic have benefited from lower expenditure on other discretionary items throughout the year,” he says. “This coupled with aggressive operator promotion looks set to drive a bumper iPhone cycle.”
Investors will also have a keen eye on any updates on the Apple Plus streaming platform, which forms a key part of the tech giant’s increased focus on services.
It’s been a rocky period for Facebook, which has come under fierce scrutiny from regulators over its handling of harmful material and misinformation during the pandemic and in the run-up to the US presidential election.
“Even if Facebook can hobble through the reputational minefield it is facing in the US elections, its relationship with its key audiences — advertisers and users — is still under threat from its actions around hate speech and social justice and the success of its rivals,” says Tamara Littleton, chief executive of The Social Element.
Littleton adds that the social media site’s investment in social commerce products and new services “may be intended to remedy the discontent”.
The site has established new shopping features and connected its messaging services across Instagram and Messenger in a bid to drive up engagement and advertising revenue.
“For Facebook, the calculation is simple, the more time people spend within the ecosystem, the more it wins – so anything that works towards that aim is dollars in the bank,” says Mindshare’s Johnson. “WhatsApp integration is next on the list.”
Much like Alphabet, however, investor focus will be on how much advertising spend has bounced back after the pandemic slump.
Twitter has also been in the firing line amid concerns about content moderation, with boss Jack Dorsey falling foul of US President Trump in a row over alleged bias.
Again, though, focus will be on advertising, which is the company’s principal source of revenue.
Johnsons describes Covid-19 as a “double-edged sword” for Twitter, as increased engagement has been offset by lower ad spend.
The key metric to watch for Twitter is monetisable daily active users — which refers to any user that logs in and can be shown ads.
This metric jumped 34 per cent in the second quarter as people flocked to the platform for news and updates on the coronavirus crisis.
Revenue is likely to fall again in tonight’s results, but investors will have an eye on whether a number of new measures — such as a tougher stance on removing misinformation and new prompts encouraging users to read articles before they share them — will have boosted trustworthiness and lured back advertisers.