Stress-tech!

Stocks rallied yesterday; a carryover of bullish spirit sparked by Wednesday’s post-FOMC presser. Bond yields fell, paving the way for interest-sensitive tech to lead the charge higher.

The Iceman Cometh. I will save you from having to Google what that tagline is all about. Some of you may recognize it as the title of the famous 1939 Eugene O’Neill play. It has a catchy title, indeed, though it leaves many scratching their heads. It turns out that the title is a reference to a biblical passage in Matthew (25:5). I am no biblical scholar, but it seems clear that the theme of virgins awaiting the Savior only to yelp out a cry at midnight seems to fit the story well. Interestingly, we can also apply it to the market, desperately awaiting salvation from the Fed. Indeed, when that savior arrived, it was not that clear. However, it was clear enough to embolden believers into a risk-on mood. It was not until after midnight (the market’s) close that a dose of reality was paid out when the tech triumvirate released their earnings. This morning I will jump right to it, as those will likely dictate market action today. Let’s start with Apple.

Apple Inc (AAPL) shares are lower by -3.28% in the premarket after it missed EPS and Revenue estimates by -3.12% and -3.29% respectively. The company attributed the miss to macroeconomic headwinds, supply chain challenges, and a challenging foreign exchange environment. These factors led to Apple’s worst holiday season in 4 years, and its first Q4 loss since 2019. As one might expect, Apple, with its higher price-point products would be particularly susceptible in a tough macro environment such as we are in today. There were a couple of notable slipups that contributed to Apple’s woes. Products which would be in high demand during the holidays were late to market, no doubt caused by the COVID lockdowns in China. Those lockdowns also added to Apple’s woes as product sales in China suffered through that period. The company did not provide current quarter guidance, but it implied that performance would be similar, which would mean a single digit decline. Check out the following chart to get a graphic idea of sales in 2021 vs 2022 (I clipped it from Bloomberg).

There is some good news in the chart, and it is not that iPad sales increased, but rather that Services increased. While services revenue is eclipsed by iPhone sales, Services represents a bigger growth opportunity for the company in the future, as there are only so many folks willing to pony up for an iPhone, and those folks only have so many pockets to fill. Going forward, some of those challenges faced by the company in Q4 can possibly subside. Clearly FX, a market driven factor will even out in coming quarters, and supply chain issues are likely to abate as China recently eased its Zero Covid policy. According to the earnings call, foot traffic in Chinese retail stores has increased, which could also help improve sales going forward. Though these are positives, the current climate is likely to be challenging in the coming quarters. Compared to its principal competitor Samsung, Apple’s forward EPS of 11.37x is cheaper to Samsungs 18.18x. Dividend yield: 0.6%. Potential average analyst target upside: +11.9%.

Amazon Inc (AMZN) shares are lower by -4.9% in the premarket after it announced a -27.76 miss on Q4 EPS projections. Similar to fellow tech giant Apple, Q4 is an important one for Amazon which generates significant revenues in the holiday season. On that, online revenues actually came in +9% better than the company projected. Given the macro headwinds experienced by retail, that was a shining light in the company’s release. However, that was overshadowed by performance from its AWS cloud computing division. Read this next line slowly. Amazon’s revenues from its AWS division only grew by +20%, compared to +40% a year earlier which was a disappointment. While +20% growth may seem like a sturdy bump, the unit represents a big part of the company’s overall growth story, and while no one would argue that Amazon is the online retail leader, and juggernaut, it is, like all retail, constrained by economic cyclicality and can only grow so much, overall. So goes AWS, so goes Amazon’s growth story. Still with IT spending somewhat lower, it is also cyclical, and it reflects the recent slowdown which may subside later this year into early next. In other words, there is still plenty of growth opportunity for the unit. Looking over to analysts’ forward projections, you can see by the following EPS chart, they remain positive on growth going forward. Projections are colored in grey.

The company remains committed to whittling down expenses and, according to last night's call is down with its announced 18k worker layoff, which incidentally cost the company $46 million in severance costs in Q4, with more likely to hit in the current quarter. It is notable that the decline in Amazon’s cloud business is consistent with Microsoft’s Q4 performance, giving creed to the fact that it was market-driven and not company missteps that led to the slowdown. Potential average analyst target upside: +20.1%.

Alphabet Inc (GOOG / GOOGL) shares are lower by -3.94% in the premarket after it announced misses in EPS and Sales for Q4. As expected, the company attributed its poor performance to a decline in Ad sales across the board. Paid search is typically more resilient to economic headwinds, and it too was sluggish in Q4, indicating a broader spending slowdown. We have witnessed digital advertising slowdowns in the past, and Alphabet’s results are consistent to what we have learned from its ad-sales competitors, indicating that it is not a company-specific slipup, but rather a cyclical, systemic slowdown. Moving over to Alphabet’s Google Cloud business, one would expect challenges given the admissions made by competitors Microsoft and Amazon. The big story there is that Alphabet’s cloud unit has yet to become profitable, though CFO Ruth Porat said in last night’s call that the company is quickly closing in on profitability. That is good news for Alphabet’s growth story, and a necessary one given that its revenues are relatively stable. Though that might seem like a good thing, it is a challenge for a company that wishes to be treated as a growth company and not consumer staple company. On that front, the company invests heavily in R&D, specifically AI, which is Wall Street’s latest growth fixation. Alphabet stands to be a leader in the space and last night’s earnings call was highlighted by CEO Sundar Pichai’s announcement that it will soon release LaMDA, part of its soon-to-be-introduced suite of AI products. Innovation is Alphabet’s ace in the hole, and it is still estimated to control 98% of all online search, which provides it with relatively steady cash flow. Imagine a world without Google search. You can’t right. The company’s stock came under quite a bit of pressure in 2022, falling some -38%, but based on the chart below, you can see that its recent uptick has set it up for a bigger potential upside move. It will get resistance from its 200-day moving average at around $105 and its 38.2% Fibonacci retracement line at around $108. Last I looked the stock was trading around $104.79, just beneath those key points of resistance. Let’s see what the day brings. Potential average analyst target upside: +17.8%.

YESTERDAY’S MARKETS

Stocks rallied yesterday following Wednesday’s Fed announcement. The S&P500 rose by _1.47%, the Dow Jones Industrial Average slipped by -0.11%, the Nasdaq Composite Index jumped by +3.25%, and the Russell 2000 Index advanced by +1.97%. Bonds traded higher and 10-year Treasury Note yields fell by -2 basis points to 3.39%. Cryptos traded up by +2.63% and Bitcoin slipped by -0.94%.

NEXT UP

• Change in Nonfarm Payrolls (Jan) is expected to come in at 188k after gaining coming in at 223k last month.
• Unemployment Rate (Jan) may have increased to 3.6% from 3.5%.
• ISM Services Index (Jan) is expected to have moved to 50.5 (expansion) from December’s revised 49.2.
• Next week: Plenty more earnings and several key economic indicators. Check in on Monday for calendars and details.