Coinbase Losses Exceed Expectations As Sales Deteriorate

Leading crypto exchange Coinbase reported a Q2 net loss of just under $1.1 billion this afternoon, or $4.98 a share, as sales fell more than had been expected and the company’s company’s stock tumbled 6%.

The beleaguered exchange has been hit hard in recent months by a confluence of declining cryptocurrency market conditions, regulatory pushback and investor uncertainty that has dragged its stock price down over 55% since late March.

Coinbase recorded the majority of its $802.6 million in revenue last quarter–over 80%–from transaction fees on sales and exchanges of cryptocurrency. That’s down 61% from the corresponding 2021 quarter and 35% less than Q1.

Analysts had predicted revenue of $868.4 million for the quarter and an adjusted per share loss only about half as severe as reported. In Q2 2021, the company earned $1.6 billion.

The below-consensus revenue may have been reflected rising use of the exchange by customers who aren’t there currency trading, according to Michael Miller, an equity analyst at Morningstar. “Coinbase’s problem wasn’t so much that customers abandoned it — transacting users were essentially flat sequentially — but that there was a shift toward non-traders, such as those involved in staking.”

Despite the flood of red ink, Coinbase has an ace in the hole: its $6.2 billion of cash in the bank, barely changed from Q1. That figure includes $362 million of stablecoin USDC.

“Coinbase is really caught out with its cost structure, and now that crypto prices have come way down, they’re in a position where they do need to cut costs pretty dramatically,” says Miller. “While they are caught out on the costs side, though, they did go into this crypto downturn with a very strong balance sheet.”

The exchange cut costs aggressively last quarter, laying off 1,100 employees, 18% of its workforce, in mid-June and reducing its marketing outlays from a high point last fall (in which it spent $14 million on a single 60-second Super Bowl ad). Operating expenses, adjusted to remove cryptocurrency impairments, fell to $1.48 billion in Q2 from more than $1.5 billion in each of the two previous quarters but were still higher than $1.3 billion a year earlier.

“Expenses haven’t come down much—they were more or less flat sequentially. Coinbase did reduce cost guidance for the rest of 2022, though,” says Miller. “It does sound like they’re comfortable with this level of losses—they were within the guardrails they set. Unless revenues decline further, I wouldn’t expect to see any further layoffs.”

Coinbase’s web engagement fell dramatically, according to data from Simliarweb: visits to coinbase.com fell 45% in June, even while U.S. sites of competitors like FTX showed them more than doubling. Moreover, Coinbase’s weekly web display ads have dropped by over 35% since early June.

“By looking at web traffic and app traffic, you just see a trend towards somewhat of a decline in engagement for cryptocurrency in general,” says David Carr, senior insights manager at Similarweb. “But for Coinbase, the decrease in the percentage of customers using the app on a regular basis and the decrease in the amount of time they spend on the app are signs of lesser enthusiasm.”

Ben Weiss, CEO of crypto financial services and Bitcoin ATM provider CoinFlip, says the market may be overly pessimistic. “I feel that the market is conflating the performance of crypto assets with the companies in the crypto ecosystem, and therefore the reduction in Coinbase stock price is possibly an overcorrection,” says Weiss. “Coinbase is a household name in the crypto space and is extremely competitive among crypto exchanges. While companies must continue to innovate to stay relevant, Coinbase is still extremely well positioned among exchanges to continue to capitalize in the crypto space.”

I am a reporter for Forbes’ Money and Markets team. Originally from New Haven, Connecticut, I currently live in New York City.

Source: Coinbase Losses Exceed Expectations As Sales Deteriorate

Critics:

Coinbase operates as a remote-first company and has no physical headquarters As part of its SEC filing to go public, the company reported 43 million verified users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries. It also reported net revenue of $1.14 billion in 2020, up from $483 million the previous year. The company also reported a net income of $322 million after posting a loss in 2019.

Out of the $782 billion worth of assets on the crypto market, some $90 billion worth is held on the Coinbase platform. As of 2018, the company offered buy/sell trading functionality in 32 countries,while the cryptocurrency wallet was available in 190 countries worldwide. In a May 2022 Form 10-Q filing, Coinbase stated that “because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors“.

The “Coinbase Effect” refers to the rise in price of cryptocurrencies listed for sale on a dominant crypto exchange such as Coinbase in the days after the news becomes public. According to Barron’s, the effect of getting a cryptocurrency listed on the exchange plays a big role in what cryptocurrencies gain widespread acceptance.

On February 16, 2018, Coinbase admitted that some customers were overcharged in error for credit and debit purchases of cryptocurrencies. The problem was initiated when banks and card issuers changed the merchant category code (MCC) for cryptocurrency purchases earlier that month. This meant that cryptocurrency payments would now be processed as “cash advances”, meaning that banks and credit card issuers could begin charging customers cash advance fees for cryptocurrency purchases.

Customers who purchased cryptocurrency on their exchange between January 22 and February 11, 2018, could have been affected. At first, Visa blamed Coinbase, telling the Financial Times on February 16 that it had “not made any systems changes that would result in the duplicate transactions cardholders are reporting.” However, the latest statement from Visa and Worldpay on the Coinbase blog clarifies: “This issue was not caused by Coinbase.

In March 2018, Quartz reported that the number of monthly customer complaints against Coinbase jumped more than 100% in January of that year, to 889, citing official Consumer Financial Protection Bureau data, with more than 400 of those categorized as “money was not available when promised”.The article also noted that the company was subsequently increasing its customer service staff to reduce wait times. In December 2021, CNBC reported that Coinbase froze the cryptocurrency GYEN due to a sudden price spike, resulting in many traders losing money.

On July 22, 2022, a former Coinbase product manager, Ishan Wahi, along with Nikhil Wahi (Ishan’s brother) and Sameer Ramani (a friend), was charged in the first-ever insider trading case in cryptocurrency by prosecutors for the Southern District of New York and the Securities and Exchange Commission.According to the complaint filed in SEC v. Wahi, Ishan Wahi allegedly shared information that certain tokens were about to be listed by Coinbase with Nikhil Wahi and Ramani, who then allegedly acted upon that information to make trades for an alleged illicit profit in excess of $1.5 million.

According to federal prosecutors, Ishan Wahi purchased a one-way ticket to India upon being summoned by Coinbase to the company’s Seattle office for a meeting. Wahi was subsequently intercepted by law enforcement from boarding a May 16 flight to India. Coinbase’s chief security officer, Philip Martin, noted that the company provided prosecutors with information from an internal investigation.

Related contents:

Coinbase Earnings Weren’t as Bad as They Seem The Motley Fool

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How Lotteries Work: Structure, Drawings, Odds, Payouts

In the US, most states offer some type of cash lottery like Mega Millions or Powerball. When you play, you purchase a ticket in hopes of winning a cash payout at random.

Although the odds of winning a cash lottery are very low, Americans still spend billions of dollars each year on tickets. But not everyone considers the tax implications or what they would do with their earnings if they did win.

How do lotteries work?

When you play the lottery, you’ll spend a small sum of money to get the chance to win a huge prize. The winners are selected at random. If you pick all the winning numbers, you’ll win the jackpot, or share it with others who have all the correct numbers as well. Most lotteries also include smaller prizes for getting some combination of winning numbers, but not all of them.

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According to Professor Michael Collins, a chartered financial analyst and CEO of WinCap Financial, most cash lotteries are administered by the government. “Government-administered lotteries are usually run by state governments in order to raise revenue,” he explains.

The proceeds of lottery funds can go to fund education, provide treatment for gambling addictions, or to protect the environment. However, lottery proceeds account for a small source of any state’s revenue.

Note: The North American Association of State and Provincial Lotteries (NASPL) outlines the beneficiaries of different types of lotteries and how much money was transferred in total.

How do lottery drawings work?

“Consumers purchase lottery tickets, and the money they spend goes into the winning pot,” says Joel Ohman, a CFP® professional and CEO of ExpertInsuranceReviews.com. The longer a lottery goes without a winner, the more money accumulates in the pool. When someone wins, the lottery pool starts over again.

Lottery winners are chosen at random via a drawing. For instance, the Mega Millions drawings happen on Tuesday and Fridays at 11 PM EST, and you can watch them on live TV.

During the living drawing, five white balls are selected at random, and the balls are numbered one through 70. Then one gold ball is chosen from a set of balls numbered one through 25. If the six numbers selected match your lottery ticket number, you’re the big winner.

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What are the odds of winning the lottery?

The odds of winning a lottery jackpot are very low, even if you buy tickets on a regular basis. And there’s a lot of variation in the odds depending on the type of lottery you purchase tickets for.

In general, the bigger the lottery, the lower your odds of winning. In the Powerball lottery, for example, players select five numbers from 1 to 69, and then choose one number from 1 to 26 for the Powerball. To win the jackpot, you have to get all six numbers. With so many possible combinations, the odds of winning come out to 1 in 292,201,338.

How do lottery payouts work?

There are two ways lottery winners can claim their earnings — as a lump sum or annual payments over time. Both options result in a lottery payout, but there are pros and cons to each.

You’ll receive your after-tax winnings immediately if you claim a lump sum payout. Choosing this option lets you start investing and taking advantage of compound interest immediately. 

But if you receive payments over time, commonly referred to as a lottery annuity, the total amount you receive will be closer to the advertised winnings. And annuity payments can protect winners who might be tempted to spend the money all at once.

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Lotteries and taxes

According to Collins, the tax implications of winning the lottery vary depending on the type of lottery and the jurisdiction in which it’s located.

“For example, in the United States, winnings from government-administered lotteries are subject to federal and state income taxes,” he says.

“Lottery earnings are considered wages by state and federal governments,” Ohman notes.  Winning a significant amount of money will probably push you into a higher tax bracket, “so not only will you pay higher taxes on your winnings, but you’ll also pay higher taxes on your regular wages,” he says. “The state tax will depend on where you live.”

By:

Source: How Lotteries Work: Structure, Drawings, Odds, Payouts

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Dow’s Cash Flow Increases The Safety Of Its Dividend Yield

On a price return basis, the Safest Dividend Yields Model Portfolio (+4.4%) outperformed the S&P 500 (+3.8%) by 0.6% from June 23, 2022 through July 19, 2022. On a total return basis, the Model Portfolio (+4.8%) outperformed the S&P 500 (+3.8%) by 1.0% over the same time. The best performing large cap stock was up 12% and the best performing small cap stock was up 14%. Overall, nine out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from June 23, 2022 through July 19, 2022.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Since its spin-off from Dupont De Nemours Inc. (DD) in 2019, Dow has grown revenue by 13% compounded annually and net operating profit after-tax (NOPAT) by 65% compounded annually. Dow’s NOPAT margin rose from 6% in 2019 to 13% over the trailing twelve months (TTM), while invested capital turns improved from 0.7 to 1.1 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 4% in 2019 to 14% TTM.

Figure 1: Dow’s Revenue and NOPAT Since 2019

Dow has increased its regular dividend from $2.10/share in 2019 to $2.80/share in 2021. The current quarterly dividend, when annualized, provides a 5.5% dividend yield.

Dow’s free cash flow (FCF) comfortably exceeds its regular dividend payments. From 2019 to 2021, Dow generated $16.0 billion (43% of current market cap) in FCF while paying $5.7 billion in dividends. Over the TTM, Dow has generated $6 billion in FCF and paid $2 billion in dividends. See Figure 2.

Figure 2: Dow’s FCF vs. Regular Dividends Since 2019

Companies with strong FCF provide higher quality dividend yields because the firm has the cash to support its dividend. Dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

DOW Is Undervalued

At its current price of $52/share, DOW has a price-to-economic book value (PEBV) ratio of 0.3. This ratio means the market expects Dow’s NOPAT to permanently decline by 70%. This expectation seems overly pessimistic given that Dow grew NOPAT by 65% compounded annually since 2019.

Even if Dow’s NOPAT margin falls to 9% (vs. 13% over the TTM) and the company’s NOPAT falls 5% compounded annually over the next decade, the stock would be worth $75+/share today – a 44% upside. See the math behind this reverse DCF scenario. Should the company’s NOPAT not fall at such a steep rate, or even grow from current levels, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Dow’s 10-K and 10-Qs:

Income Statement: I made $3.1 billion in adjustments with a net effect of removing $930 million in non-operating expenses (2% of revenue).

Balance Sheet: I made $16.6 billion in adjustments to calculate invested capital with a net increase of $11.3 billion. The most notable adjustment was $9.0 billion (18% of reported net assets) in other comprehensive income.

Valuation: I made $24.1 billion in adjustments with a net effect of decreasing shareholder value by $19.8 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $6.1 billion in underfunded pensions. This adjustment represents 16% of Dow’s market value.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.

New Constructs leverages reliable fundamental data to provide unconflicted insights into the fundamentals and valuation of private and public businesses.

Source: Dow’s Cash Flow Increases The Safety Of Its Dividend Yield

Critics by Macrotrends

Dow annual/quarterly free cash flow history and growth rate from 2017 to 2022. Free cash flow can be defined as a measure of financial performance calculated as operating cash flow minus capital expenditures.

  • Dow free cash flow for the quarter ending June 30, 2022 was 2,607.00, a year-over-year.
  • Dow free cash flow for the twelve months ending June 30, 2022 was , a year-over-year.
  • Dow annual free cash flow for 2021 was $4.79B, a 18.72% decline from 2020.
  • Dow annual free cash flow for 2020 was $5.893B, a 48.51% increase from 2019.
  • Dow annual free cash flow for 2019 was $3.968B, a 91.69% increase from 2018.

Dow annual/quarterly revenue history and growth rate from 2017 to 2022. Revenue can be defined as the amount of money a company receives from its customers in exchange for the sales of goods or services. Revenue is the top line item on an income statement from which all costs and expenses are subtracted to arrive at net income.

  • Dow revenue for the quarter ending June 30, 2022 was $15.664B, a 12.81% increase year-over-year.
  • Dow revenue for the twelve months ending June 30, 2022 was $60.129B, a 30.19% increase year-over-year.
  • Dow annual revenue for 2021 was $54.968B, a 42.62% increase from 2020.
  • Dow annual revenue for 2020 was $38.542B, a 10.27% decline from 2019.
  • Dow annual revenue for 2019 was $42.951B, a 13.41% decline from 2018.

Current and historical gross margin, operating margin and net profit margin for Dow (DOW) over the last 10 years. Profit margin can be defined as the percentage of revenue that a company retains as income after the deduction of expenses. Dow net profit margin as of June 30, 2022 is 11.06%.

Current and historical p/e ratio for Dow (DOW) from 2017 to 2022. The price to earnings ratio is calculated by taking the latest closing price and dividing it by the most recent earnings per share (EPS) number. The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure. Dow PE ratio as of August 03, 2022 is 5.40.

Current and historical current ratio for Dow (DOW) from 2017 to 2022. Current ratio can be defined as a liquidity ratio that measures a company’s ability to pay short-term obligations. Dow current ratio for the three months ending June 30, 2022 was 1.64.

Historical dividend payout and yield for Dow (DOW) since 2021. The current TTM dividend payout for Dow (DOW) as of August 03, 2022 is $2.80. The current dividend yield for Dow as of August 03, 2022 is 5.43%.

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Big Tech Earnings: Microsoft And Alphabet Signal Q2 Could Be A Bottom

Big Tech earnings were off to a solid start on Tuesday when Microsoft and Google reported stable revenue growth and margins that are unchanged from recent macro conditions. The strong margins were especially welcomed as many companies have been missing on operating margins and cash flow. Meanwhile, Microsoft delivered free cash flow of $17.8 billion and net profits of $16.7 billion along with upbeat guidance for the year. Similarly, Google reported strong free cash flow of $12.6 billion and net profits of $16 billion in the recent quarter.

The same was not true for Meta, which primarily stumbled on its Q3 guide. The company reported its first decline in revenue in company history and guidance for next quarter missed due to FX headwinds. Analyst expectations for Q3 were for $30.4 billion, or 5% growth. Instead, the company guided for $26 billion to $28.5 billion, or a YoY decline of 6% at the mid-point of the guidance with the current exchange rates creating a 6% headwind.

Alphabet: Search is Resilient

The company reported revenue of 13%, or 16% in constant currency, for a total of $69.7 billion. The operating margin was flat year-over-year, which is a win. Operating expenses grew 24% yet the operating margin was in line with previous quarters at 28% for $19.58 billion in operating income.

The net margin was a bit weaker than previous quarters in 2021 at $16 billion yet in line with last quarter. The company has free cash flow of $12.6 billion. The company has $125 billion in cash and marketable securities. The company reported EPS of $1.21 compared to $1.36 for the same period last year.

Search was stable given the current environment at 13.5% growth to $40 billion and this provided relief that not all ad spend has been paused. Search was strong last quarter at 24% growth to $40 billion, and was flat sequentially in terms of total dollar amount.

The effects of Google’s large R&D department and advances in AI cannot be overstated when it comes to the resiliency of Search in the current environment. We are getting a very slight glimpse of what’s to come for Google in terms of its advertising dominance.

The expectations were that YouTube would weigh on the report yet YouTube provided a bit of growth at 5% year-over-year. The company was adamant that YouTube growth is low because of the tough comps. The tough comps was touched on many times, such as this: “the modest year-on-year growth rate primarily reflects lapping the uniquely strong performance in the second quarter of 2021.”

Notably, Google Cloud slowed to 35.6% growth down from 43.8% growth last quarter. This means Google Cloud is growing slower than Azure on a lower revenue base. This is something to monitor in the future.

Microsoft: Double-Digit Guide for FY2023

Many tech companies are declining to give guidance while Microsoft’s management provided strong guidance in both Q1 FY2023 and for FY2023. For Q1 FY2023, management provided a 10% guide across product lines for next quarter (this includes FX headwinds) and also provided guidance for fiscal year 2023 ending in June: “We continue to expect double-digit revenue and operating income growth in both constant currency and U.S. dollars. Revenue growth will be driven by continued momentum in our commercial business and a focus on share gains across our portfolio.”

Revenue grew by 12% YoY to $51.9 billion (missed Wall Street analysts’ estimates by 0.94%) and EPS came at $2.23 (missed estimates by 2.9%). The strong US dollar negatively impacted the revenue by $595 million and EPS by $0.04. Microsoft Cloud revenue grew by 28% YoY to $25 billion. The company’s results are good considering the various macro uncertainties, China lockdown, and the strong US dollar. FY2022 revenue grew by 18% YoY to $198.3 billion and net income increased by 19% YoY to $72.7 billion.

The company’s gross income increased 10% YoY to $35.4 billion. The gross margin decreased by 147 bps to 68.2% when compared to the same period last year. Excluding the impact from the change in the accounting estimate, the gross margin was relatively unchanged.

The operating income increased by 8% YoY to $20.5 billion. The operating margin decreased by 187 bps to 39.5%. Excluding the impact from the change in the accounting estimate and FX, the operating margin would be relatively unchanged.

The company’s cash flows continued to be strong in the recent quarter. Cash from operations grew by 8% YoY to $24.6 billion (47% of revenue) and free cash flow increased by 9% YoY to $17.8 billion (34% of revenue). The company has cash and investments of $104.8 billion and debt of $49.8 billion.

Despite weakness in PCs, the company’s other segments continue to grow. Intelligent Cloud grew 20% YoY to $20.9 billion and Productivity and Business Processes segment grew 13% YoY to $16.6 billion. The company also made an accounting change in the useful life for server and network equipment assets from four to six years which will extend the depreciation expenses for the company.

Amy Hood said in the earnings call, “First, effective at the start of FY ’23, we are extending the depreciable useful life for server and network equipment assets in our cloud infrastructure from 4 to 6 years, which will apply to the asset balances on our balance sheet as of June 30, 2022, as well as future asset purchases.

As a result, based on the outstanding balances as of June 30, we expect fiscal year ’23 operating income to be favorably impacted by approximately $3.7 billion for the full fiscal year and approximately $1.1 billion in the first quarter.”

Meta: Misses Q3 Expectations

The market does not need a perfect quarter for Q2 given the numerous headwinds facing tech companies. What the market does need is a sign that a company may have bottomed and is able to guide growth (even if minimal) from Q2-Q3.

In Q2, Meta’s revenue declined for the first time in history. This was expected. However, what was not expected was the lower guide for the next quarter. The company guided for $26 billion to $28.5 billion, or a YoY decline of 6% at the mid-point of the guidance. The guidance takes into consideration the weak advertising demand the company experienced in the recent quarter and also the foreign exchange headwinds of 6%. The investors were expecting a return of growth in the next quarter.

The company had a slight beat on DAUs at 1.97 billion versus 1.96 billion expected. Monthly users were 2.93 billion slightly missed expectations of 2.94 billion. Operating expenses rose 22% YoY to $20.4 billion. This led to the drop in the operating margin to 29% in the recent quarter compared to 43% in the same period last year. It also led to the 36% YoY drop in the net income to $6.69 billion. The EPS came at $2.46 compared to $3.61 in Q2 2021.

The company is looking to further reduce the operating expenses for the year to $85 billion to $88 billion from the last quarter guidance of $87 billion to $92 million and the prior estimate of $90 billion to $95 billion.

Apple: Strong results despite challenges

Apple released strong results despite the challenging macro environment, strong US dollar, and supply chain issues. Revenue grew by 1.9% YoY to $83 billion, which was in-line with the analysts’ estimates. It reported EPS of $1.20, which beat estimates by $0.04 (4% beat).

The product segment revenue declined marginally by 0.9% YoY to $63.4 billion and the services segment revenue grew by 12% YoY to $19.6 billion. The company’s installed base of active devices reached an all-time high. It had more than 860 million of paid subscriptions, up 160 million in the past year.

The company did not give exact revenue guidance for the next quarter. Tim Cook, CEO of the company, said in the earnings call, “We’re going to accelerate revenues in the September quarter as compared to the June quarter and will decelerate on the Services side.”

The company’s gross margin was 43.26%, compared to 43.75% in the previous quarter and 43.29% in the same period last year. It was above the management’s guidance of 42% to 43%. Net income was $19.4 billion or $1.20 per share compared to $21.7 billion or $1.30 per share in the same period last year. It beat the analysts’ EPS estimates by $0.04.

The company had cash and marketable securities of $179 billion and a debt of $120 billion. The company reported strong operating cash flows of $23 billion (28% of revenue). The company returned over $28 billion to the shareholders in the recent quarter in the form of dividends and share repurchases.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own Alphabet and Microsoft at the time of writing.

Beth Kindig is the CEO and Lead Tech Analyst for the I/O Fund with cumulative audited results of 141%, beating Ark and other leading active tech funds over four audit periods

Source: Big Tech Earnings: Microsoft And Alphabet Signal Q2 Could Be A Bottom

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Wall Street Still Loves Big Tech Stocks: Analysts See Further Upside Ahead Of Crucial Earnings Week

Despite a brutal selloff so far this year in the tech sector, Wall Street analysts remain cautiously optimistic about Big Tech stocks ahead of upcoming second-quarter earnings this week, with the majority of experts predicting that companies like Apple, Microsoft and Alphabet can continue to post strong profits in the long run.

Though tech stocks have been hard-hit this year (with the Nasdaq down 25%) amid surging inflation, rising interest rates and ongoing recession fears, a majority of Wall Street analysts still maintain buy ratings on Apple, Alphabet, Meta, Microsoft and Amazon ahead of key earnings results this week.

Three firms reiterated buy ratings on several big names Monday: Deutsche Bank predicted solid results from Apple, Bank of America expects Facebook parent Meta to see ad revenue take a smaller hit than expected and Oppenheimer predicts “robust” growth in Amazon’s AWS cloud services business.

Analysts note that while the tech sector is already slowing down, hiring across the board amid the more challenging economic environment, after a big selloff earlier this year, valuations are now looking much more attractive.

Netflix and Tesla saw their stocks rally last week after “better than feared” results, while Snap delivered “another train wreck quarter that highlights a digital ad slowdown, Apple iOS privacy headwinds and TikTok competition further heating up,” according to Wedbush analyst Dan Ives.

While there’s been some “good and bad news” in the tech sector, “there are some encouraging signs” and investors can now buy shares in some of the biggest companies at a more attractive entry point, says Lindsey Bell, chief markets and money strategist for Ally.

Among the more than 250 combined analysts covering the five Big Tech companies reporting earnings this week—Apple, Alphabet, Meta, Microsoft and Amazon—fewer than five have sell ratings—a sign of just how bullish Wall Street is on some of America’s most valuable tech companies.

Alphabet and Microsoft kick off Big Tech earnings on Tuesday. Meta reports Wednesday, Apple and Amazon on Thursday. “Investors should be selective when picking stocks within the tech sector,” says David Trainer, CEO of New Constructs. “The strongest types of stocks are the ones where cash flows are strong and valuations underestimate the company’s ability to generate cash flows in the future.”

He especially likes Google parent Alphabet, which is trading at a “much cheaper” valuation than its peers and should continue to outperform, thanks to its ability to keep innovating. Trainer is “not as confident” about Facebook parent Meta, however, questioning the company’s “ability to sustain profits,” especially as it struggles to retain users amid increased competition from the likes of TikTok. His firm also remains bullish and “big fans” of Apple, though the stock is still somewhat expensive, he adds.

All of the Big Tech stocks have seen big losses so far this year, though they have recovered somewhat in recent months. Meta has suffered the greatest losses, with its market value falling by roughly half as Facebook’s ad business continues to struggle. Amazon and Alphabet are both down roughly 25%, Microsoft more than 20% and Apple 15%.

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.

Source: Wall Street Still Loves Big Tech Stocks: Analysts See Further Upside Ahead Of Crucial Earnings Week

Critics by

In a single two-and-a-half-hour stretch on Jan. 25, Microsoft Corp. stock erased $156 billion of its shareholders’ money, then rebounded, recovering all of its losses and adding $74 billion. In one sense this was just another lurch in the markets’ wild ride in 2022, as investors adjust to recovering economies and the prospect of rising interest rates. But it also points to a new environment in which the most valuable U.S. tech companies are going to have to work harder to justify their trillion-dollar or near-trillion-dollar valuations.

The Big Tech companies are still doing well. The day after Microsoft’s earnings, Apple reported a quarterly performance that wildly exceeded expectations. On Feb. 1, Alphabet also beat analysts’ projections. Share prices for both companies spiked—but remain below their peaks. The way Microsoft’s white-knuckle afternoon played out is particularly illustrative of the shifting environment: At 4 p.m. New York time, it released quarterly financial results.

They exceeded analysts’ expectations, except for one crucial number: Growth slowed slightly at its lucrative Azure cloud computing business. Investors panicked, sending shares down as much as 6.8% in aftermarket trading. Shortly after 6 p.m., Chief Financial Officer Amy Hood told analysts that cloud computing growth would accelerate again in the next fiscal quarter. The stock jumped, erasing the earlier losses.

Short-term stock gyrations have limited predictive power. But the activity around Microsoft’s earnings highlighted how negatively investors are now inclined to react to slowing growth at key units, even if revenue and earnings beat expectations.

A standard way to look at how excited investors are about a particular company is to compare its share price with its expected earnings. In January 2017 the stocks of the five most valuable tech companies—Apple, Amazon, Facebook, Google, and Microsoft—traded in line with the S&P 500 as a whole, at 19 times their predicted earnings. By September 2020 that multiple for the Big Tech companies was 42, while the market as a whole traded at a 27 multiple.

Investors were rewarded. Apple shareholders enjoyed an average 43% annual return over the past five years if they reinvested all their dividends back into the stock. Microsoft, Amazon, and Google generated average returns of 38%, 28%, and 26%, respectively. Even Facebook’s relatively modest 18% outperformed the S&P 500’s average of 16%.

The lockdowns helped widen the gap between tech and everyone else, according to Kasper Elmgreen, the head of equities at Amundi SA. “The economy gets turned off, so we had an historic economic contraction that hit [vehicular] traffic, leisure, industrials, construction, financial services, and so forth hardest,” he says.

That could be changing. The Covid-19 omicron wave is receding in many places, and businesses that suffered during the pandemic could benefit more than tech companies from a renewed recovery. This could send investors looking to increase their stakes in companies they’ve spurned for the past two years while they focused on the tech giants.

“The whole case for investing in these companies and inflating their premiums was the fact that growth was scarce and they had the strongest growth prospects in the S&P 500,” says Gina Martin Adams, the chief equity strategist for Bloomberg Intelligence in New York. “As economic conditions improve, that premium will naturally deflate.”

Related contents:

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New China Covid-19 Lockdowns Would Threaten U.S. Economic Recovery (Just Ask Tesla)

Tesla Shares Rally Despite Slowdown In Profits, Impact From China Shutdown

Dow Jumps 700 Points, Analysts ‘Cautiously Optimistic’ After More Solid EarningsNZ sharemarket falls another 0.2%, underperforms Wall Street Stuff.co.nz

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