FAAMG Earnings Takeaways

FAAMG Earnings Takeaways

It was a busy week of earnings. All members of FAAMG (Facebook, Alphabet/Google, Amazon, Microsoft, and Apple) released their results for the first quarter of 2021 within a few days of each other. I rounded up some of the key figures and management quotes.

For those who want the short version, all five companies reported stellar growth – despite coming off massive revenue bases – and seem well-positioned for growth. And here’s the long version.

Alphabet Inc (NASDAQ: GOOG)

The parent company of search giant, Google kicked things off with another impressive set of results. Revenue jumped 34% to US$41.2 billion, driven by broad-based growth from its advertising businesses, other services, and Google Cloud.

Google Advertising was up 32% from a year ago to US$44.7 billion, as Youtube ad revenue grew by around 50% to US$6.0 billion.

Google Cloud revenue grew 46% to US$4.0 billion and operating losses in the segment narrowed to just US$974 million from US$1.7 billion, demonstrating improving operating leverage.

The tech behemoth is now sitting on US$135 billion in cash and marketable securities. It announced that it would be using US$50 billion to buy back shares in the future. At its current market cap, that would reduce the share count by around 3%.

Sundar Pichai, CEO of Alphabet and Google, said that with the economy rebounding, the company’s product releases are returning to a regular cadence.

For example, Google Maps will be releasing Indoor Live View, which helps users navigate airports, transit stations, and malls using augmented reality. Google News Showcase, which Google is investing US$1 billion in, is also showing some momentum as it added more than 170 publications across 12 countries during the first quarter of 2021.

Management also believes that Google Cloud will eventually become profitable with increasing scale. Ruth Porat, CFO of Alphabet and Google, shared the following during Alphabet’s latest earnings call:

“As for Google Cloud, our approach to building the business has not changed. We remain focused on revenue growth, and we will continue to invest aggressively in products and our go-to-market organization given the opportunity we see. The operating results in Q1 in part reflect some notable items in the quarter, first, the lapping of the unusually high allowances for credit losses recorded in the first quarter of 2020 as I already mentioned; and second, lower depreciation expense due to the change in estimated useful lives, although the dollar benefit will diminish throughout the course of the year across segments. As we have noted previously, operating results should benefit from increased scale over time; however, at this point, we do remain focused on continuing to invest to build the Cloud organization for long-term performance.”

Apple Inc (NASDAQ: AAPL)

The most valuable company in the world reported a whopping 54% increase in revenue to US$89.6 billion compared to a year ago.

There was broad-based growth across Apple’s suite of hardware products of the iPhone, Mac, iPad, and other devices. iPhone sales grew 66% to US$47.9 billion, driven by the strong popularity of the new iPhone 12 series. iPad and Macs continue to see strength as work and study from home have become commonplace globally. Mac sales were up 70% to US$9.1 billion while iPad sales were up 79% to US$7.8 billion. Services revenue also grew, albeit at a slower pace than hardware sales, at 26% to US$16.9 billion.

Apple is now sitting on US$82.6 billion in net cash (total cash & investments minus total debt) after generating US$56.9 billion in free cash flow in the six months ended 31 March 2021.

Despite the run-up in Apple’s share price over the last 12 months, the company’s CFO, Luca Maestri, still feels that buybacks are a good way to allocate some of the company’s excess capital. He said in the latest earnings conference call:

“We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. Given the confidence we have in our business today and into the future, our board has authorized an additional 90 billion for share repurchases. We’re also raising our dividend by 7% to $0.22 per share, and we continue to plan for annual increases in the dividend going forward.”

Microsoft Corporation (NASDAQ: MSFT)

The tech giant reported another outstanding set of results, continuing its strong run from 2020. Revenue was up 19% to US$41.7 billion, operating income surged 31% to US$17.0 billion, and non-GAAP diluted earnings per share spiked 39% to US$1.95.

Microsoft saw broad-based growth across almost all of its products. Its Office Commercial and Office Consumer products, together with their respective cloud services, gew up 14% and 5%, respectively. In terms of revenue growth, Linkedin rose 25%, Windows OEM was up 10%, Xbox content grew 34%, and cloud computing services provider Azure spiked by 50%.

As usual, Microsoft CEO Satya Nadella spent a good chunk of time at the company’s latest earnings conference call discussing Azure. He said:

As the world’s COGS become more digital, computing will become more ubiquitous and decentralized. We are building Azure to address organizations’ needs in a multi-cloud, multi-edge world.

We have more data centre regions than any other provider, including new regions in China, Indonesia, Malaysia, as well as the United States.

Azure has always been hybrid by design, and we are accelerating our innovation to meet customers where they are. Azure Arc extends the Azure control plane across on-premises, multi-cloud, and the edge, and we’re going further with Arc-enabled machine learning and Arc-enabled Kubernetes.”

He also added that Microsoft is positioned to meet the data analytics demands of its clients. He explained:

“ The next-generation analytics service, Azure Synapse, accelerates time to insight by bringing together data integration, enterprise data warehousing, and big data analytics into one unified service. No other provider offers the limitless scale, price-performance, and deep integrations of Synapse. With Spark integration, for example, organizations can handle large-scale data processing workloads. With Azure Machine Learning, they can build advanced AI models. With Power BI, anyone in the organization can access insights. 

We are seeing adoption from thousands of customers, including AB InBev, Dentsu, and Swiss Re. Queries performed using Synapse have increased 105 per cent over the last quarter alone. 

We are leading in hyper scale SQL and non-SQL databases to support the increasing volume, variety, and velocity of data. Customers continue to choose Azure for their relational database workloads, with SQL Server on Azure VMs uses up 129 per cent year over year. And Cosmos DB is the database of choice for cloud-native app development – at any scale. Transaction volume increased 170 percent year over year.”

Facebook Inc (NASDAQ: FB)

It was nothing short of an amazing quarter for Facebook. Revenue was up 48% to US$26.2 billio, with advertising revenue jumping 46% to US$25.4 billion. Facebook enjoyed a 30% increase in the average price per ad, and a 12% hike in the number of ads shown.

With monthly active users growing more slowly and ad load reaching optimum levels, Facebook said that ad prices will be its primary driver of growth for the rest of 2021.

The company also lowered its 2021 capital expense outlook from US$21-23 billion to US$19-21 billion.

COO Sheryl Sandberg spent some time in the latest earnings conference call addressing the impact to Facebook’s business stemming from changes to Apple’s privacy policy which lets users opt out of tracking. She said:

“Yes, there are challenges coming to personalized advertising and we’ve been pretty open about that. We’re doing a huge amount of work to prepare. We’re working with our customers to implement Apple’s API and our own Aggregated Events Measurement API to mitigate the impact of the iOS14 changes. We’re rebuilding meaningful elements of our ad tech so that our system continues to perform when we have access to less data in the future. And we’re part of long-term collaborations with industry bodies like the W3C on initiatives like privacy enhancing technologies that provide personalized experiences while limiting access to people’s information.

It’s also on us to keep making the case that personalized advertising is good for people and businesses, and to better explain how it works so that people realize that personalized ads are privacy-protective.

Small businesses don’t have to understand the alphabet soup of acronyms they’ll need to comply with, but they do need to have confidence that they can still use our tools to reach the people who want to buy what they’re selling in a privacy-safe way. We’re confident they can, and that they can continue to get great results as digital advertising evolves.”

The other thing that caught my attention is Facebook’s recent success with Oculus (the company’s AR/VR platform) and the company’s focus on doubling down on AR/VR technology. Facebook CEO Mark Zuckerberg said,

“I believe that augmented and virtual reality are going to enable a deeper sense of presence and social connection than any existing platform, and they’re going to be an important part of how we’ll interact with computers in the future. So we’re going to keep investing heavily in building out the best experiences here, and this accounts for a major part of our overall R&D budget growth.”

He added,

“One interesting trend is that we’re seeing the app ecosystem broaden out beyond games into other categories as well. The most used apps are social, which fits our original theory for why we wanted to build this platform in the first place. We’re also seeing productivity and even fitness apps. For example, we launched a tool so people can subscribe to services like FitXR to do boxing and dancing in VR just like they would for biking on Peloton.

We introduced App Lab so developers can ship early versions of their apps directly to consumers without having to go through the Oculus Store. Between App Lab and streaming from PCs, we’re pioneering a much more open model of app store than what’s currently available on phones today.

Over time, I expect augmented and virtual reality to unlock a massive amount of value both in people’s lives and the economy overall. There’s still a long way to go here, and most of our investments to make this work are ahead of us. But I think the feedback we’re getting from our products is giving us more confidence that our prediction for the future here will happen and that we’re focusing on the right areas.”

Amazon.com Inc (NASDAQ: AMZN)

The e-commerce and cloud computing juggernaut rounded things off on Friday morning (Singapore time) by announcing a spectacular set of results.

Net sales was up 44% to US$108.5 billion. As a result, operating income was up by 122% to US$8.9 billion, and diluted earning per share up 213% to US$15.79. Revenue from AWS – the company’s cloud computing services provider -grew 32% to US$13.5 billion and us now a US$54 billion sales run rate business. Amazon has also breached the 200 million paid Prime members mark worldwide. The company’s business outside of North America reported its 4th consecutive quarter of profitability and generated more than a billion dollars in profit for the first time.

Amazon’s high margin third-party seller services and subscription services businesses increased revenue by 60% and 34% respectively. Brian Olsavsky, CFO of Amazon, sees more growth for AWS even in a post-pandemic world. He shared the following in Amazon’s latest earnings conference call:

“During COVID, we’ve seen many enterprises decide that they no longer want to manage their own technology infrastructure. They see that partnering with AWS and moving to the cloud gives them better cost, better capability and better speed of innovation. We expect this trend to continue as we move into the post pandemic recovery. There’s significant momentum around the world, including broad and deep engagement across major industries.

Note: An earlier version of this article was published at The Good Investorsa personal blog run by our friends.

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Disclosure: Jeremy Chia owns shares of Facebook, Amazon, Alphabet, Microsoft and Apple.