Tech Sector +7 to +8% the Last Two Weeks: Still Facing Tough Compares from Q1 and Q2, ’21

Technology has had a nice run from the lows in early March and then again since Monday, March 14th, 2022.

As of Wednesday night’s close, March 23rd, 2022, the QQQ’s were down 10.3% and the Nasdaq Composite was down 9.8% YTD. The SP 500 was down 5.3% as of last night’s close as a comparison.

Tech has struggled since the very first of the year thanks to tough compares, higher interest rates and their impact on higher-multiple stocks.

The big challenge for technology will be the Q1 ’21 compares when earnings start on or around April 10th. The first quarter of 2021 saw some strong upside financial results amongst “megacap tech” as the top 5 tech stocks within the SP 500 have come to be known. The unusual aspect to this is that the real strong compare for 2021 was the 2nd quarter, not the first quarter, where technology blew out numbers and estimates. In Q2 ’21 – the strongest quarter of the year in terms of y.y growth – the SP 500 ultimately grew revenue and EPS 25% and 96% respectively.

Apple: (AAPL) – In Q1 ’21 Apple reported 54% revenue growth, 114% operating income growth, and 107% EPS growth (all y.y), reporting $89.5 billion in revenue and $1.49 in EPS versus the $74 billion and $0.99 revenue and EPS estimate. In the March ’21 quarter, iPhone revenue grew 66%, China grew 82% overall, and Mac revenue hit an all-time-high of $70 billion, up 70% y.y.  That’s going to be a tough compare for the iPhone giant. That doesn’t mean the stock will fall 10%, but upside in AAPL may be limited until the late March ’22 quarter is reported in late April ’22.

Apple is scheduled to report their March ’22 quarter on April 28, 2022. Current consensus (unconfirmed) per is expecting $94 billion in revenue and $1.44 in EPS for “expected” growth of 5% and -3% respectively.

In calendar 2019, (not Apple’s fiscal year), Apple averaged just 2% revenue growth and -4% operating income growth over the 4 quarters. This was pre the 5G iPhone.

Apple’s “average” EPS and revenue beat the last 10 quarters, which includes the entry and exit from the pandemic was 16% and 6% respectively.

Microsoft: (MSFT) – In the first calendar quarter of 2021, (MSFT’s fiscal Q3 ’21), the software giant grew revenue y.y by 19%, operating income by 31% and EPS by 45% y.y, with the key factor in that quarter being MSFT’s +400 bp expansion in operating margin. Unlike Apple, MSFT actually had a better June quarter in 2021, probably since it’s the giant’s fiscal Q4, and grew revenue, operating income and EPS, +21%, +42% and +49% y.y respectively. (unconfirmed) is expecting MSFT to report it’s March ’22 quarter on April 26th, 2022,. with consensus expecting $2.19 in EPS on $49 billion in revenue for “expected” y.y growth of 8% and 18% respectively.

Over the 4 quarters of calendar 2019, MSFT averaged 13% revenue growth, operating income growth of 27% and EPS growth of 21% all y.y.

Amazon: (AMZN) – the ecommerce giant generated 44% revenue growth, 54% operating income growth and 200% EPS growth in Q1, 2021. In fact the 44% revenue growth generated in both Q4 ’20 and Q1 ’21 was the strongest y.y revenue growth for the ecommerce giant since the 3rd quarter of 2011, which was also 44%. Looking at the valuation spreadsheet numbers, the $8.50 in EPS expected this quarter (also to be reported April 28th, 2022) is now the 3rd quarter in a row where Amazon’s EPS has seen negative growth y.y. (unconfirmed) is expecting Amazon to report on April 28, ’22, with consensus expecting $116.3 bl in revenue and EPS of $8.89. IBES by Refinitiv is still expecting Amazon EPS of $8.50 so the more conservative EPS estimate is being used. Expected y.y revenue growth is just 7% and EPS is expected to decline 46%.

Amazon is facing a post-pandemic hangover in terms of revenue growth: AMZN’s revenue growth “averaged” 37% in 2020, and then averaged 24% in 2021, but last quarter – Q4 ’21 – AMZN’s revenue growth only rose 9% y.y and with the $116.3 bl estimate for Q1 ’22 is only expected to grow 7% y.y.

That’s downright consumer staple like.

Since 2000, Amazon has only had one year where total revenue grew less than 20%, but this year could be a struggle. Too early to say since we won’t know until the 2nd quarter is reported in July ’22 that we will have a better feel for the numbers. After Q4 ’21’s results, the consensus revenue estimate for Amazon for full-year 2022 was $552 billion; today that same estimate has fallen to $541 billion.

Alphabet: (GOOGL) – Alphabet reported revenue, operating income and EPS growth in Q1 ’21 of 34%, 98% and 166% respectively. Maybe even more shocking was q2 ’21 actual results which saw 62%, 203% and 169% y.y growth in revenue, operating income and EPS (respectively). Google has two tough quarters as a “comp” now in 2022. In 2019, Google “averaged” 18% revenue growth, 12% operating income growth and 11% EPS growth pre-pandemic. It was in the first half of 2021 that YouTube, Google Cloud and advertising really grew sharply y.y. (still unconfirmed) has Google reporting April 26th, 2022 with their consensus estimates showing an expected $68 billion in revenue on $25.68 in EPS for 23% revenue growth on a y.y decline in EPS of 2%.

Google’s 2019 4-quarter average for y.y revenue, operating income and EPS was 18%, 11% and 12% respectively.

Facebook Meta: (FB) –  The problem with Facebook as all investors know by now is that the shift to the Metaverse for FB will slow expected revenue growth, possibly for the next few years. Expected 2022 revenue growth by quarter for FB is 8%, 6%, 14% and 18% over the next 4 quarters while EPS growth per the consensus (IBES estimates) is -23%, -22%, -9% and +7%.

In Q1 ’21, when “old” Facebook still mattered revenue grew 50% y.y while operating income and EPS both grew 93% so compare that to the above numbers. Advertising and ARPU growth grew 42% and 32% respectively in Q1 ’21. EPS and revenue consensus were revised sharply higher after that quarter as well.

Q2 ’21 was even stronger for FB, with y.y revenue growth at 62% and operating income and EPS growth at 203% and 169%.

Facebook is scheduled to report April 27th per and is expecting $28.4 bl in revenue and $2.51 in EPS for expected y.y growth of 8% and -23%.

During the 2019 calendar year, Facebook averaged 18% revenue growth, 11% operating income growth and 12% EPS growth over the 4 quarters.

Conclusion / Summary: With the rally of the last two weeks, there is a lot of excitement in large-cap and mega-cap tech again, but be careful, the compares to 2021 for the first half of 2022 are very tough. That being said the expectations because of said compares are quite low. Amazon, Google and Facebook have monster compares to the 2nd quarter of 2021. Heck, even the SP 500 itself, with 25% revenue growth and 95% EPS growth from Q2 ’21 could have a problem with rising rates.

It wasn’t until this update and comparison was in-process that it became obvious how strong Q2 ’21 was in terms of y.y growth.

The fact is that investors are still dealing with the shortfalls and then the rapid rebound around the pandemic and it’s impact on financial results, and will only see somewhat normalized results at the end of 2022. Really the last two calendar quarters of 2022 might approximate the truer growth rates for mega-cap tech.

Reporting dates:

  • Microsoft and Google – April 26th
  • Facebook – April 27th
  • Amazon and Apple – April 28th

Any errors on the math and estimates are my own. The sources for the revenue and EPS consensus are IBES data by Refinitiv and, with Briefing saying all scheduled earnings reports are so for “unconfirmed”. Having 6 spreadsheet open at a time and flipping back-and-forth and dropping in estimates and calculating y.y growth rates can get cumbersome and mistakes can happen.

The point of the post is that the comparisons for mega-cap tech remain difficult until the June quarter’s results are seen in 3 months. The 2019 average growth rates are posted so readers can use as a baseline of reference. The mega-cap tech names could remain a tough trade for the next 90 days.

The weekly earnings update will follow tomorrow.

Thanks for reading.


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