Big Tech Goes Five For Five

As October came to a close, three of the five largest American tech companies beat earnings expectations.

The quarterly results of Amazon, Microsoft, and Alphabet were impressive, with each firm bringing in both more revenue and profit than analysts had expected. And, as we explored at the time, the companies managed to come up with their wins in unique fashion. And so it goes this time around as well.

Since then, Facebook and Apple reported their own results, continuing the trend of top- and bottom-line beats from the leading United States-based tech outfits.

The Big 5, as we call them, are now worth not merely $3 trillion, a milestone we marked some time ago, but roughly $3.3 trillion, more than 10 percent higher than that previous high-water mark.

“What is going on?” is a fine question to ask. First, let’s quickly remind ourselves about what the first three-fifths of the Big 5 recently accomplished, and then dive into the results of the last two firms.

These happy days in tech won’t last forever, but in the third quarter of 2017, it was a good time to be an incumbent platform company.

First Three

To briefly review, the first of the Big 5 to report had notable quarters. To keep this short and reasonably sweet, we’ll move in bullet points for now:

• Microsoft’s revenue beat ($24.5 billion over a projected $23.56 billion), and earnings-per-share (EPS) beat ($0.84 over $0.72) came amidst the firm meeting its cloud computing revenue promise ahead of schedule. The company’s amalgamated “Commercial Cloud” run rate hit the $20 billion mark, implying – based on how Redmond tracks the metric – that the various constituencies of that cloud cohort generated at least $1.66 billion in revenue during the last month of the quarter. The firm had previously promised to reach the $20 billion run rate threshold sometime inside the next several quarters. Cloud matters for Microsoft because it’s the company’s route to mostly-predictable recurring revenue, making it the opposite of one-off license sales of Windows operating system.
• Amazon beat expectations with revenue of $43.7 billion (expectations: $42.14 billion) and EPS of $0.52 (expectations: $0.03). This demonstrated two things for the Seattle-based ecommerce-entertainment-cloud consortium: that it is not doomed to slow growth (on a percentage basis), and that it can make money even as it continues to grow. The firm’s year-over-year revenue growth rate accelerated from 29 percent in the year-ago quarter, to 34 percent in its most recent quarter. And that second number was reached from a higher footing. Of course, buying Whole Foods didn’t hurt, but Amazon managed to earn more profit at the same time that it accelerated growth, which in business is a winning competition.
• Alphabet’s $27.8 billion in revenue beat expectations of $27.2 billion, while its EPS came in at $9.57, miles ahead of the expected $8.33. What went so right? In the quarter, Alphabet’s Google unit managed to halt the sequential decline in its per-click revenue. Put more simply, in the third quarter, Google’s cost-per-click went up from the second quarter. It was still down on a year-over-year basis, but for Google, which has reported rising ad clicks and falling click prices for some time, the change was notable. Google sold more ads, and at a price that rose a full percent from the preceding quarter. That’s a sea change.

The path that each firm took to beating expectations was different, but each led to resounding success, at least when it comes to beating expectations. Of course, the Nasdaq Composite didn’t get to over 6,000 by accident, but Big Tech’s initial victory lap even at market highs was almost surprising.

But, it was an open question as to whether Apple and Facebook were positioned to match the previous three’s success.

Last Two

The streak continued. Apple and Facebook both managed to rocket through analyst estimates, capping off a quarter of across-the-board wins for tech’s largest domestic players.

We’ll repeat our prior formatting to save us from having to come up with something more creative:

• Apple stormed the gates, reporting revenue of $52.6 billion, over expectations of $50.7 billion. Its EPS came in at $2.07 per share, ahead of estimates of $1.87. The firm’s iPhone, iPad, and Mac sales all rose during the quarter, while its Services revenue category reached $8.5 billion in top-line. Heading into the critical holiday quarter with better-than-expected results from the previous quarter and two new phones on the market, Apple seems to be on strong footing. Investors agreed. To that point, Apple is worth $174.67 per share today, putting its market cap (via Google Finance) at $902.2 billion. That’s spitting distance from $1 trillion.
• Finally, Facebook. Facebook, the youngest of the Big 5, reported revenue growth of 47 percent in its most recent quarter, down from a year-ago growth pace of 59 percent. Still, its revenue of $10.3 billion beat expectations of $9.84 billion, and Facebook’s EPS of $1.59 was far ahead of the anticipated $1.28 figure. The company also continued to grow both its user base and revenue-per-user during the period. However, Facebook signaled that forthcoming efforts to help prevent the platform from being weaponized by antagonistic nation-states would ding its future profits.

While that final sentence might sound a bit out of place, it underscores something that I think we often forget. Namely how big these companies in fact are: Facebook has nearly 1.4 billion daily active users, Google is the key path to information for much of the world, Amazon wants to take over how you purchase everything, Microsoft is cementing its SaaS products in homes and offices around the globe, and Apple makes so much money that its earnings reports are almost hard to read.

But are the good times for the big shots good for everyone? Perhaps not.

What About Startups?

TechCrunch recently raised the question of “Peak Startup,” arguing that the wave of vibrant startup-led technology change has passed for the time being. Not that it won’t ever come back, of course, but ask yourself if the following declaration doesn’t sound about right:

“[w]e live in a new world now, and it favors the big, not the small. The pendulum has already begun to swing back. Big businesses and executives, rather than startups and entrepreneurs, will own the next decade; today’s graduates are much more likely to work for Mark Zuckerberg than follow in his footsteps.”

The piece details its own set of whys – after “back-to-back massive worldwide hardware revolutions” that “there is no such [new] revolution en route” – but our above work should supplement the argument. The biggest tech companies are only cementing gains and stacking cash when times are good and smaller, disruptive players have the most access to capital that they have had since the DotCom era. And if they can do that when times are good for everyone, what happens when feast turns to famine?

When the bull cycle flips, and it always does, imagine how it may affect the current, rather pleasant status quo. It isn’t too far a stretch to guess that the big companies will be sitting on profitable bottom lines with huge cash reserves when it happens. And they may do so while still-private, still-unprofitable concerns have to deal with waning interest from tech investors.

We’ll check back in after the fourth quarter closes.