Big tech companies posted strong quarterly results this week, building on the unprecedented growth during the Covid-19 pandemic.
Alphabet, Apple, Netflix, Microsoft and Facebook were all key beneficiaries of prolonged lockdowns and home-working as the reliance on technology, both personally and professionally, soared.
But this trend is showing no signs of dissipating and all of these companies continue to grow their revenue streams across different products and services.
According to analysts, these companies remain good long-term investments but could face some headwinds later on in the year.
Alphabet continues to represent an “outstanding” opportunity for the long-term
Alphabet reported second quarter revenues of $61.9bn (£44.4bn), up 62% year-on-year and far better than the market expected.
That reflects increased online activity by consumers, underpinning an 83.7% rise in YouTube advertising revenue, as well as higher ad demand in search and elsewhere.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “With confidence returning to economies inching out of lockdowns, marketing departments are loosening the purse strings.
“As the sales of goods and services move online, Google is gathering an ever-increasing share of global advertising spend.”
Free cash flow in the quarter rose from $8.6bn last year to $16.4bn and net cash at the end of the quarter stood at $121.5bn, compared to $122.8bn at the start of the year, as the group spent $24.2bn on share buybacks.
Hyett continued: “Spectacular growth, incredible cash generation and multiple category killing products all at a fairly reasonable 30 times future earnings. It’s difficult to find things not to like at Alphabet.”
Christopher Rossbach, chief investment officer of J. Stern & Co agreed, adding that Alphabet’s advertising success showed it had successfully expanded away from its core Google search.
Rossbach said: “Alphabet is able to reinvest its profits from core search into new business areas, reinforcing the investment case.
“The company is inching ever closer to a $2trn market cap and it continues to represent an outstanding opportunity for the long-term.”
Netflix aim to “keep eyes on screens”
Netflix added 1.5m new global paid subscriptions in the second quarter, taking the total number to 209.2m globally, up 8.4% on last year.
Excluding the impact of exchange rates, average revenue per user (ARM) rose 4% with the strongest growth coming from Netflix’s biggest market of North America and Canada, up 9% to $14.54.
Europe, Middle East & Africa and Latin America both rose just 2% to $11.66 and $7.50 respectively, while Asia Pacific was up 1% to $9.74.
Netflix said it planned to expand further into games, which will be included in subscriptions at no additional cost.
Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, said: “A foray into the world of gaming might simply sound like a nice idea, but it’s an important next step in Netflix’s efforts to keep our eyes on its screens.”
She added that a high proportion of younger people already had a Netflix subscription, so “getting them hooked on games is a potential stroke of genius.”
Despite its growth, Lund-Yates said competition was the biggest threat to the investment case.
“It’s reasonable to think the average customer will happily pay for two streaming subscriptions, like Netflix and Prime and the water’s being muddied by the unstoppable rise of Disney+ and its wider family including Hulu,” she said.
“That’s something to watch out for given the slowdown in growth in the group’s most important region of North America and Canada.”
Microsoft’s long-established core products “dominate the market”
Microsoft benefited from significant growth in the Azure cloud computing division where revenues jumped 51%, helping the overall business to report a growth rate of 21%.
Profits moved ahead by 47% compared to the same period a year ago, with growth flattered by the impact of the pandemic on the prior period.
Furthermore, overall revenues of $26.2bn beat consensus by a margin of more than 5%.
HL Select Global Growth fund manager, Steve Clayton, who holds the company in the portfolio, said: “Microsoft’s long-established core products, Windows operating systems and Office software, dominate their markets and look set to generate reliable cash flows for years to come,” he said.
Clayton added that few things were as valuable as a cash-generative business with a dominant market position in growing markets.
“Microsoft fits the bill perfectly,” he said. “Especially with a rising proportion of its revenues coming from recurring sources, like Office 365.”
“Apple smashed all expectations”
Apple’s third quarter net sales of $81.4bn rose 36% compared to last year, and reflected record revenue in every geography, surpassing market expectations.
iPhone sales rose 49.8% to $39.6bn, while Mac and iPad sales were up 16.3% and 11.9% to $8.2bn and $7.4bn. Wearables, home and accessories also grew, rising from $6.5bn to $8.8bn.
However, services was the best-performing division, with net sales rising 32.9% to $17.5bn.
The Americas was still the group’s biggest market, making up 44.0% of net sales at $35.9bn, up from $27.0bn last year, while Greater China had the biggest improvement overall, with net sales of $14.8bn up over 58%.
The higher profits in turn fed into free cash flow of $76.0bn, up from $54.6bn this time last year.
Adam Vettese, analyst at multi-asset investment platform eToro, said: “Apple's third quarter was predicted to be strong, but it smashed all expectations when it revealed its results after the closing bell yesterday.”
As stated, demand for its products was a boon for companies like Apple, which benefited greatly from the work from home switch.
Vettese continued: “Sixteen months into the pandemic, however, this demand is already priced into Apple’s shares, which explains why they have lost ground in after-market trading.
“While Apple’s third quarter results have been impressive, it may struggle to repeat the magic in upcoming results, particularly if global supply problems start to hit sales.”
“The draw of Facebook’s global audience shouldn’t be forgotten”
Keeping with the trend of the other technology giants, on Wednesday Facebook’s results were also better than analysts expected, as second quarter revenue rose 56% to $29.1bn.
The number of Facebook’s daily and monthly active users rose 7% to 1.9bn and 2.9bn respectively. Including the group’s other social networks, the number of daily active people was 2.8bn, up 12%.
As of the end of June, Facebook had $64.1bn in net cash, compared to $62.0bn at the start of the year.
However, Facebook warned: “In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth”.
Facebook also saw a 56% rise in ad revenue to $28.6bn in the second quarter.
Lund-Yates said Facebook, WhatsApp and Messenger were already an integral part of our lives, and businesses would continue to pay for a way in.
“That’s what makes Facebook’s some of the most reliable ad revenues in the world,” she said. “It’s true that revenue growth is expected to temper as we lap the exceptional demand seen in previous periods, but the draw of Facebook’s global audience shouldn’t be forgotten as the numbers iron themselves out.”