Earnings season is nearly complete with Q3 results already released by over 80% of S&P 500 members. It’s reassuring to note that actual results have once again surpassed expectations. Notably, Q3 earnings estimates saw minimal changes prior to the reporting cycle, amplifying the significance of this outperformance.
While the overall earnings landscape isn’t stellar, it’s worth highlighting that Q3 earnings growth is set to turn positive, a promising shift following three consecutive quarters of decline.
However, the Q3 results do indicate a concerning loss of momentum on the revenues front, both in terms of the growth rate and the proportion of companies exceeding top-line expectations.
A particularly disquieting development is the downward revisions of estimates for the current (2023 Q4) and upcoming quarters, marking a departure from the relatively stable trend observed over the past six months. Even more incredible was the performance of the FAANG stocks!
When we refer to “FAANG stocks,” we are alluding to:
- Facebook, now under the umbrella of Meta Platforms (NASDAQ: META)
- Apple (NASDAQ: AAPL)
- Amazon (NASDAQ: AMZN)
- Netflix (NASDAQ: NFLX)
- Google, now a subsidiary of Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG)
The distinguishing factor of the FAANGs lies in their firmly established competitive advantages and seemingly insurmountable moats.
Meta Platforms oversees four of the most widely downloaded social media applications globally, including Facebook, Instagram, WhatsApp, and Facebook Messenger.
Apple’s iPhone commands a majority share of the U.S. smartphone market.
Amazon captures nearly 40% of online retail sales in the United States and leads as the top provider of cloud infrastructure services through Amazon Web Services (AWS).
Netflix boasts the highest market share for both domestic and international streaming services and leads in original content among streaming providers.
Alphabet’s Google has maintained a global internet search share of at least 90% since April 2015.
Earnings Season Q3 2023
Here are four key highlights from the Q3 earnings season:
First, Q3 earnings for the 405 S&P 500 companies that have reported already show an increase of +0.4% from the same period (excluding the Energy sector drag, up +5.6%). Combining the actuals with estimates for the remaining 95 index members, Q3 earnings are expected to grow by +1.5%, accompanied by a corresponding increase in revenues.
Second, while 82.5% of the reporting S&P 500 members are surpassing EPS estimates, only 61.5% are exceeding revenue expectations. Notably, the current revenue beats percentage is the lowest since the first quarter of 2020.
Third, the Tech sector is back on a growth trajectory, with Q3 earnings for the reported companies up +15.8% and revenues up +2.7%. The sector is anticipated to continue driving growth in the upcoming periods.
Finally, the revision of estimates for the current and forthcoming quarters has been notably downward, impacting several sectors, including Autos, Medical, Transportation, and Consumer Discretionary. On a brighter note, estimates have risen for the Energy, Utilities, Industrials, and Retail sectors.
These insights reflect the current status of the ongoing earnings season, with a notable set of companies, including Disney, Uber, Lyft, and Berkshire Hathaway, poised to report their Q3 results this week. The ‘blended’ Q3 beats percentage, standing at 55.3%, places the performance of these companies in perspective.
Earnings Season – S&P500
As the Q3 earnings season for the S&P 500 winds down, we’re observing positive trends that indicate a healthy upturn. Notably, both the number and size of positive earnings surprises are currently surpassing their 10-year averages, contributing to a boost in the index’s reported earnings for the third quarter, marking the first positive year-over-year growth since Q3 2022.
So far, 81% of the S&P 500 companies have disclosed their Q3 2023 results, with an impressive 82% reporting actual EPS above estimates, exceeding both the 5-year and 10-year averages. T
his is a promising sign, with companies reporting earnings that are 7.1% above estimates on aggregate, despite being slightly below the 5-year average.
Several sectors, including Consumer Discretionary and Information Technology, have demonstrated positive surprises, counterbalancing the negative surprises from the Health Care sector. This positive momentum has elevated the overall earnings of the index compared to the previous week and the end of the quarter.
Similarly, in terms of revenues, 62% of the companies have reported revenues above estimates, albeit slightly below historical averages. Notably, the index’s blended revenue growth rate for the third quarter has reached 2.3%, marking the 11th consecutive quarter of revenue growth for the index, with notable contributions from the Real Estate, Consumer Discretionary, and Communication Services sectors.
Looking forward, analysts’ projections for Q4 2023 and CY 2023 earnings growth have been revised slightly downward since September 30, with an anticipated stronger rebound in earnings growth projected for CY 2024.
Despite these shifts, the forward 12-month P/E ratio stands at a stable 17.8, aligning closely with the previous quarter’s figures. This suggests a cautious yet relatively optimistic outlook among investors.
In the coming weeks, CMTrading anticipates 55 S&P 500 companies, including one Dow 30 component, to release their Q3 results, providing further insights into the evolving market trends.
Earnings Season – How did Meta do?
Facebook’s parent company, Meta Platforms (META) experienced robust growth in sales, marking its most rapid expansion in two years and a doubling of earnings in the third quarter. However, the market responded with a decline in Meta’s stock post-earnings, fueled by investor concerns over the company’s remarks regarding an unpredictable advertising landscape.
In the latest earnings report released on Wednesday, Meta revealed that it earned an adjusted $4.39 per share from a revenue of $34.1 billion for the quarter ending on September 30. FactSet’s polled analysts had anticipated adjusted earnings of $3.64 per share on revenue of $33.6 billion.
The company’s performance showcased a significant 168% year-over-year surge in earnings and a commendable 23% increase in sales. Notably, this revenue hike represents Meta’s most rapid year-over-year expansion since September 2021 and sets a new record for quarterly sales within the realm of social media giants.
Earnings Season – winner
Mark Zuckerberg, Meta’s founder and CEO, expressed his satisfaction with the company’s quarterly performance, emphasizing the progress made in advancing AI and mixed reality through initiatives such as the launch of Quest 3, Ray-Ban Meta smart glasses, and the AI studio.
However, despite the positive results, Meta’s stock experienced a 3.7% dip, closing trading at 288.35 on the stock market today.
Looking ahead, although Meta’s stock initially saw an increase following the earnings report, it reversed course during the earnings call as company officials voiced concerns about an uncertain advertising environment in the ongoing quarter.
For the current fourth quarter, Meta projects revenue ranging between $36.5 billion to $40 billion, with the midpoint of $38.25 billion falling short of FactSet’s analysts’ expected $38.8 billion.
Earnings Season – How did Apple do?
Apple’s recent financial report for the quarter ending in September 2023 indicated a 1% dip in revenue, marking the fourth consecutive quarter of decline. However, despite the anticipated decrease, the tech giant managed to exceed Wall Street expectations, posting a total quarterly revenue of $89.5bn, slightly surpassing the predicted $89.28bn.
Notably, the company achieved record-breaking figures in iPhone and services revenue, with $43.81bn and $22.3bn, respectively, as highlighted by Apple CEO Tim Cook.
The market responded positively to the news, with Apple’s stock witnessing a more than 2% surge ahead of the scheduled earnings call. Moreover, the shares have shown a notable increase of approximately 32.5% over the course of the year.
As the company gears up for the holiday season, traditionally its busiest period, investors are keen to gain insights into the current quarter’s performance and the demand status for the recently launched iPhone 15.
While the revenue from Macs experienced a significant 34% year-over-year decline, amounting to $7.6bn, and iPad revenue also witnessed a 10% fall, Apple remains optimistic, emphasizing its robust product lineup for the upcoming holiday season.
Tim Cook emphasized this sentiment, stating, “We now have our strongest lineup of products ever heading into the holiday season, including the iPhone 15 lineup and our first carbon-neutral Apple Watch models, a major milestone in our efforts to make all Apple products carbon neutral by 2030.”
The services segment, considered instrumental in enhancing the value of Apple’s hardware, continued its upward trajectory, with revenue climbing from $19.2bn to $22.3bn, achieving yet another record high.
Notably, Apple now boasts an impressive 1 billion active subscriptions across all its products, double the number from three years ago.
With recent price increases in offerings such as Apple TV+ and Apple News, industry analysts anticipate a further surge in revenue for the next quarter. Dipanjan Chaterjee, a principal analyst at Forrester, noted that the rapid growth in services has helped counterbalance declines in other areas of Apple’s business.
However, despite its strong performance in the domestic market, Apple faces some uncertainties in international markets, particularly in China, where the quarterly revenue of $15.5bn fell short of analysts’ expectations of $16.8bn.
Nonetheless, the company remains committed to its global expansion efforts, as evidenced by recent store openings in India and China, further solidifying its presence on the global stage.
Earnings Season – How did Amazon do?
Amazon exceeded Wall Street’s expectations in its Q3 earnings report, recording a total revenue of $143.1 billion and net income of $9.9 billion.
Notably, in the entertainment sector, Amazon emphasized the sustained momentum of its advertising business, which soared to over $12 billion in the quarter, marking a 26% increase from the previous year.
This advertising segment encompasses Freevee and Thursday Night Football, alongside other programming, with plans to introduce ads to the core Prime Video service early next year.
Furthermore, the ad business encompasses promotions for products sold through the Amazon marketplace, which constitutes the majority of this division.
The company also underscored its involvement in the progressive field of generative AI, a trending topic among all tech firms this earnings season.
Following the pattern set by Alphabet, the owner of Google, Meta, the parent company of Facebook and Instagram, and Snap, Amazon reported a stellar quarter that surpassed Wall Street projections. Despite the robust digital advertising market, the landscape for ads from conventional entertainment companies appears to be challenging.
Andy Jassy, Amazon’s CEO, remarked, “We had a strong third quarter as our cost to serve and speed of delivery in our Stores business took another step forward, our AWS growth continued to stabilize, our Advertising revenue grew robustly, and overall operating income and free cash flow rose significantly.”
He further highlighted the rapid advancements within the AWS team, particularly in generative AI, showcasing the positive reception from various notable customers employing AWS for their generative AI workloads, including Adidas, Booking.com, GoDaddy, LexisNexis, Merck, Royal Philips, and United Airlines.
Amazon, known for its multifaceted presence, operates as a behemoth, with its online retail business and AWS serving as central components, complemented by Prime, housing its video and entertainment divisions.
Earnings Season – How did Netflix do?
Netflix added nine million subscribers in the third quarter and saw a year-over-year increase in revenue despite strikes by Hollywood writers and actors that brought the entertainment industry largely to a standstill.
Netflix’s revenue hit $8.5 billion in the quarter, the streaming company said in an earnings announcement on Wednesday, up 8 percent from a year earlier. The increase was credited to better-than-expected growth in subscribers to 247 million worldwide.
The company’s net income was $1.6 billion, up nearly 20 percent from a year earlier. Netflix is expected to spend some $13 billion on content this year, down from $17 billion, because of the writers’ strike, which recently concluded, and the actors’ strike, which continues after talks recently broke off.
Ted Sarandos, co-chairman of Netflix, said in the earnings conference call that Netflix was “incredibly and totally committed to ending this strike,” pointing to how it has hurt the industry and the economy at large.
But he added that a new demand last week from the actors’ guild — what he called “a subscriber levy that is unrelated to viewing or success” — “really broke our momentum.”
Netflix also said it was raising the monthly price for its premium ad-free service in the United States, to $22.99 from $19.99, and for its basic plan, which is available only to existing subscribers. It will also raise prices in Britain and France.
The premium service can be used on four devices at a time. The monthly price for the standard ad-free service, which can be used on two devices at once, will stay at $15.49. The basic plan — Netflix’s lowest without advertising — will increase to $11.99 from $9.99.
Analysts attributed the increase to an effort to lure more people to Netflix’s $6.99 service, which includes advertisements and generates additional revenue.
Earnings Season – How did Google (Alphabet) do?
Alphabet’s shares experienced a significant 7% surge during after-hours trading in October 2023 following the company’s impressive earnings report, driven by substantial growth in its cloud computing segment.
The reported earnings of $1.44 per share exceeded Refinitiv’s projected $1.34 per share (adjusted), while revenue of $74.6 billion surpassed the estimated $72.82 billion from Refinitiv. The breakdown of additional key figures includes the following highlights:
- YouTube ads reached $7.67 billion, surpassing Street Account’s projection of $7.43 billion.
- Google Cloud generated $8.03 billion, exceeding StreetAccount’s estimate of $7.87 billion.
- Traffic acquisition costs amounted to $12.54 billion, slightly above StreetAccount’s projected $12.37 billion.
Alphabet’s second-quarter revenue climbed 7% to $74.6 billion from $69.7 billion in the corresponding period last year. However, the company has faced single-digit growth for the fourth consecutive quarter, reflecting a decline in digital advertising expenditure stemming from economic uncertainties.
Analysts predict a return to double-digit growth by the fourth quarter.
As one of the leading tech giants alongside Microsoft, Alphabet initiated the earnings season, prompting investors to seek insights into the impact of cost-saving initiatives and artificial intelligence investments on profitability within the broader industry.
Before the notable after-hours surge, Alphabet had already accumulated a 47% increase for the year, outperforming the S&P 500’s 19% gain.
Alphabet’s cloud unit, which encompasses infrastructure and productivity applications, witnessed a remarkable 28% revenue growth. After registering an operating profit of $395 million in the second quarter, the division has successfully transitioned from a $590 million loss a year earlier.
The company’s ad revenue experienced a 3.3% increase to $58.14 billion, compared to $56.29 billion from the previous year.
YouTube ads exceeded analyst expectations, reaching $7.67 billion compared to $7.34 billion in the prior year, despite intensified competition from TikTok in the short-form video market.
Meanwhile, Google’s “search and other” revenue observed a modest uptick to $42.63 billion from the previous year.
The Other Bets segment, which includes the Waymo self-driving car venture and the Verily life sciences unit, recorded a remarkable 48% revenue growth to $285 million. However, the division still incurred a loss of $813 million during the period.
Net income surged to $18.37 billion, equating to $1.44 per share, up from $16 billion or $1.21 per share during the same period in 2022.
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