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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Apple and Amazon hit by supply constraints, Facebook turns Meta
Peter Garnry
Chief Investment Strategist
Summary: Apple and Amazon are leading equity futures lower today as the two giants disappointed the market on earnings and its outlook driven by supply constraints and inflationary pressure. Yesterday's earnings results have taken earnings per share growth q/q even more negative for the MSCI World highlighting that earnings growth and profit margins have peaked. We also take a look at Facebook's big change turning into Meta going all in on the metaverse which is the manifestation of augmented and virtual reality technologies. The move might be right but it comes with greats risks and many investors will take a second look at the company.
Earnings per share growth q/q turned negative for Nasdaq 100 and even more negative for MSCI World after yesterday’s string of earnings led by disappointing results from Apple and Amazon. Apple had already flagged iPhone production issues due to supply constraints and as a result the company missed revenue estimates for the iPhone and costs increased from supply issues by $6bn alone in Q3. However, higher mix of higher margin services and subscriptions pulled EPS to $1.24 in line with estimates. Apple is hit by supply constraints, but looking at estimates for revenue growth over the coming three fiscal years, Apple’s future looks a lot less slower than in the past. However, even at a slower growth rate the company is valued at a little less than 4% free cash flow yield with a very strong business model with a lot of recurring business locked in.
Amazon was the biggest negative surprise yesterday posting yet another negative free cash flow for the third straight quarter which is not something we have seen since 2000. Q3 EPS came in at $6.12 vs est. $8.96 driven by lower than estimated revenue and a $2bn increase in operating costs from wage increases and general inflation. Investors have sending Amazon shares down by 5% in pre-market driven by the very uncertain and disappointing Q4 revenue guidance of $130-140bn vs est. $142bn driven by supply constraints on top of warning that high holiday costs in Q4 could wipe out any profit.
Facebook’s jump into the metaverse is risky
Facebook is changing its name to Meta and is going all-in on the metaverse. It has been in the making for years by closed doors and recently Facebook gave more explicit hints of it, but yesterday Facebook revealed the largest overhaul and pivot of company of this size in many decades. The move into augmented reality and virtual reality is direct way to remove the negative focus from the Facebook brand, but also the physical limitations, or gateways if you will, to Facebook’s realm, which today are controlled by Apple and Google. Facebook wants to dominate the computing platform that gives access to its universe, which believe will be a metaverse delivered across different meta platforms.
There are several things about this rebranding and change of focus. It is clear why they are doing and probably long-term it is a necessity, but it increases the risks of Facebook and changes the short-term outlook. Mark Zuckerberg said that the metaverse will be tailored towards young people which Facebook is currently losing to Snapchat and TikTok , which is an indirect way of saying that growth will slow down on its current platforms. In addition the venture into the metaverse will cost a lot of investments with CAPEX going up by $10bn by next year taking CAPEX to over $30bn.
This will reduce free cash flow generation for some time and the efforts will require a venture into hardware with new VR/AR headsets coming out soon and a new watch next year to compete with Apple watch. These offerings will in addition reduce operating margins and increase the company’s complexity. On top of it, the move might be premature, as the world or young people will not find it interesting. That is the real risk. In our view many investors will begin to reduce their holdings in Facebook, or Meta as it is called, due to the drastic change in the business and the increased risks.
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