Wall Street was anticipating yesterday’s reports from Amazon (AMZN.US) and Apple (AAPL.US) – the two companies have a combined value of about $4.5 trillion and significant weightings in major stock indexes.
Amazon’s results significantly beat analysts’ forecasts for both revenue and earnings.
In contrast, Apple’s highly anticipated report – although it beat forecasts – failed to surprise the market to the same extent as Amazon, causing the company’s shares to lose ground after the close.
In addition, sales of the flagship iPhones fell by more than 2% year-on-year. It is worth noting that Apple’s capitalization is almost double that of Amazon. Index contracts have thus wiped out much of the earlier gains. What to make of the results of both companies?
Amazon (AMZN.US) results – shares gain 8% in premarket
• Revenues: $134.38 billion vs. $131.63 billion forecast and $121.1 billion in Q2 2022 (11% y/y growth)
• Earnings per share: $0.65 vs. $0.35 forecasts ($6.7 billion in net income)
• Operating margin: 5.7% vs. 3.46% forecasts
• Operating profit: $7.68 billion vs. $4.72 billion forecasts
• E-Commerce revenue: $52.97 billion vs. $52.45 billion forecasts (4% y/y growth)
• Amazon Web Services (AWS) revenue: $22.14 billion vs. $21.71 billion forecasts (12% y/y growth)
• Advertising revenue: $10.7 billion (22% y/y growth)
• Point-of-sale (Whole Foods, AmazonGo): $5.02 billion vs. $4.96 billion forecast (6% y/y growth)
• Revenue from third-party suppliers: $32.3 billion (18% y/y growth)
• Revenues in North America: $82.55 billion vs. $79.68 billion forecasts
• Subscription revenue (Amazon Prime): $9.89 billion vs. $9.79 billion forecasts (14% y/y growth)
• Shipping service expenses: $20.4 billion (6% y/y growth)
Amazon raised its Q3 revenue guidance – it sees it in the range of $138 billion to $143 billion versus estimates of $138.3 billion (9% to 13% year-over-year growth). The company estimates operating profit of $5.5 billion to $8 billion, at least double the $2.5 billion in Q2 2022.
• The strong results are largely due to a strong U.S. consumer, and it appears that sentiment around Amazon will remain at least at a decent level as long as macro data does not show a slowdown in North America;
• Wall Street was expecting the strongest report since 2021, and Amazon more than met those expectations. Shareholders should be especially pleased with the improvement in margins, which for months had been cited as the ‘Achilles heel’ of the company’s business model.
• AWS’s profits rose by double digits year over year, but still fell short of the 33% growth it achieved in the second quarter of 2022. However, it’s worth considering AWS’s size – as the company’s share of the cloud computing market grows, it becomes increasingly obvious that year-over-year growth of more than 30% is virtually impossible. So the fact is that AWS’ business growth is slowing down a bit (but still growing);
• The company intends to integrate more AI into services and products. Higher shipping costs are related to optimising services with a focus on Amazon’s user experience and satisfaction.
Apple (APPL.US) results – shares lose 2% in premarket
• Revenue: $81.8 billion vs. $81.55 billion forecasts
• Earnings per share: $1.26 vs $1.20 forecasts
• iPhone revenue:$39.67 billion vs $39.8 billion forecasts (2.4% y/y decline)
• Products revenue: $60.58 billion vs $60.67 billion forecasts
• Services revenue: $21.21 billion vs $20.77 billion forecasts (8.2% increase y/y)
• Operating expenses: $13.42 billion vs $13.5 billion forecasts
• MacBook revenue: $6.84 billion vs $6.37 billion forecasts (7.3% y/y decrease)
• Ipad revenue: $5.79 billion vs. $6.33 billion forecasts (19.8% y/y decline)
• Revenue in China: $15.76 billion vs. $14.59 billion forecasts
• Wearables revenue: $8.28 billion vs $8.38 billion (2.5% y/y increase)
• Gross margin: 44.5% vs 44.2% forecasts
• Free cash flow: $26 billion vs. $22.94 billion forecasts
• Cash: $166.5 billion vs. $179 billion in Q2 2023
The weak point of the report was mainly the lower than expected iPhone sales, indicating a weaker consumer and a slowdown in the smartphone industry.
However, this was expected by analysts, as was a slowdown in MacBook sales, reflecting a weaker market PC. Lower-than-expected sales of smart-home devices may reflect greater consumer caution, but were still up year over year.
CFO Maestri indicated that the current quarter is expected to be slightly better than the current quarter (seasonally, Q2 is usually the weakest for Apple).
However, the sentiment around Apple stock has been so good in recent months that a ‘good report’ is not enough to get the market to buy the stock at even higher prices.
Sales of Apple’s flagship devices slowed y/y but strong services (light blue line) should please. Source: Zerohedge
• Apple will unveil a new iPhone15 model in September and is also expected to unveil new VR products – VisionPro in early 2024. The company’s good overall health could ultimately be seen by the market as a good indicator for the third and fourth quarters, which are seasonally the strongest for the company, while the second quarter is the weakest on that side.
• The question investors will be asking in the coming months will be whether the unveiling of a new iPhone model or products from VR, which the company offers for around $3,500, will generate as much buyer interest in a higher interest rate environment;
• Strengths in the report include higher revenue in China and (despite lower product sales) record revenue from services, which have the highest net margins (ApplePay, AppleMusic, etc.).
• Lower costs despite costly diversification of manufacturing locations and a significant positive free cash flow surprise underscore the company’s still very strong business model. Tim Cook, Apple’s CEO, indicated that the company has been developing and exploring generative AI capabilities for years and will continue to increase spending and AI implementation to improve products and the user experience.
Article based on a story form XTB Research
