Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings Watch: Apple is a fortress and Amazon predicts weak Q4
Peter Garnry
Chief Investment Strategist
Summary: Amazon issued its weakest Q4 revenue growth outlook in the company's history and missed significantly on its operating income forecast relative to estimates suggesting Amazon is still under pressure on input costs and weakening demand with a negative surprise on its AWS revenue in Q3. Apple on the other turned out to be the bright spot this week among many disappointing earnings releases from technology companies. Next week, the earnings season will be less busy but there are still plenty of important earnings that can move equities.
Amazon plunges 14% on gloomy outlook
Just like Meta has seen an epic decline in free cash flow generation, Amazon is losing money on an unprecedented scale with 12-month trailing free cash flow declining to $-28.5bn from $-8.8bn from a year ago. Amazon overspent during the pandemic expanding its capacity to a level that is now far above its current demand from customers. Amazon’s Q3 revenue was $127.1bn vs est. $127.6bn up 15% y/y driven by third-party seller services, AWS, and advertising. The two biggest surprises in Q3 were the operating income at $2.5bn vs est. $3.1bn and AWS revenue of $20.5bn vs est. $21bn.
However, the biggest shock for investors was the Q4 revenue outlook at $140-148bn vs est. $155.5bn indicating a growth rate of just 5% y/y and thus the weakest Q4 growth in the company’s history. The Q4 outlook for operating income was $0-4bn vs est. $4.7bn indicating severe issues with short-term profitability. While sentiment is short-term negative for Amazon things could improve in 2023 as costs are reined in and logistics costs are coming down due to lower container freight rates. Amazon shares are trading around $97 in pre-market trading taking the stock back to levels not seen since the pandemic lows in early 2020.
Buffett and Munger are vindicated by Apple’s strong moat
Apple’s performance the past year with a cost-of-living crisis, supply chain constraints, and soaring input costs has been phenomenal and last night’s result confirms that Apple is a fortress that can withstand the volatile environment. Charlie Munger and Warren Buffett did the right assessment on Apple’s moat characteristics choosing Apple for its technology exposure over other technology companies. Apple has pricing power on both its hardware and software (recently they have announced that they will raise prices on their subscriptions).
In it FY22 Q4 earnings report the company reported revenue of $90.1bn up 8% y/y with solid revenue growth across all segments except for the iPad that saw double digit decline. All geographies showed growth except for Japan. Growth is miniscule now in its Greater China segment while Europe was surprisingly strong. While the numbers look good there is a considerable margin squeeze on Apple with the EBITDA margin hitting 30.8% down from 32.1% a year ago which also one of the reasons why the company is raising its subscription prices. Shares are up 1% in pre-market trading.
Key earnings next week
The Q3 earnings season is leaving a busy week with key US technology earnings that have seen disappointments from Microsoft, Alphabet, Meta and Amazon. Next week is less busy, but there are still plenty of important names. Toyota and Sony are key Japanese earnings to watch on Tuesday, and on the same day in the US, we will watch AMD and Airbnb earnings. On Wednesday, European equities will watch earnings from Novo Nordisk, Maersk, and Vestas. Novo Nordisk will be judged on its obesity drug adoption rate, Maersk will have to manage a weakening outlook for container shipping, and Vestas is struggling with profitability and its order intake. On Wednesday, the US earnings focus will be on Booking as an indicator of travel demand and Fortinet in the cyber security industry. Thursday is the big day with key earnings from Orsted, BNP Paribas, BMW, ConocoPhillips, PayPal, Starbucks, Regeneron Pharmaceuticals, and MercadoLibre. Friday ends with key European banking earnings from Societe Generale and Intesa Sanpaolo.
Monday: COSCO, Daiichi Sankyo, Stryker, NXP Semiconductors, Global Payments
Tuesday: Toyota Motor, Sony, BP, Eli Lilly, Pfizer, AMD, Mondelez, Airbnb, Uber,
Wednesday: Suncor Energy, Nutrien, Novo Nordisk, Maersk, Vestas Wind Systems, GSK, Electronic Arts, Qualcomm, CVS Health, Estee Lauder, Booking, Fortinet, Ferrari, Albemarle
Thursday: Verbund, Barrick Gold, Orsted, Novozymes, BNP Paribas, BMW, Enel, ING Groep, DBS Group, ConocoPhillips, Amgen, PayPal, Starbucks, Regeneron Pharmaceuticals, EOG Resources, Moderna, MercadoLibre, Block, Cloudflare, Coinbase
Friday: Enbridge, Societe Generale, Intesa Sanpaolo, SoftBank, Amadeus IT Group, Duke Energy
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