In focus: Tech Titans – Cloud businesses to provide resilient earnings base and growth
Share prices of mega-cap tech companies have fallen this year on the back of higher interest rates and concerns about the economy. For 2H, we believe companies with resilient earnings through their scale of operations and leadership in cloud services are better-positioned ride through what could be a rough earnings season.
Microsoft (MSFT) reported strong earnings in its fiscal 3Q, with a 26% yoy increase in cloud revenue and overall revenue of $49.4b. In early June, the company revised its Q4 revenue and earnings guidance downward, citing the impact of foreign exchange fluctuations. We expect its cloud computing segment to remain its growth driver in the coming years. MSFT reports fiscal 4Q earnings on 26 Jul.
Alphabet (GOOGL) is a leader in internet ad services. Some analysts GOOGL to benefit and gain market share from advertising rival’s Meta Plaform’s (META) woes due to changes in privacy rules by Apple and regulatory headwinds. Improving cloud segment margins may also provide a catalyst for the stock price. GOOGL reports earnings on 26 Jul.
Amazon (AMZN) reported better-than-expected Prime Day sales last week, it sold a record 300m items during Prime Day, up from 250m a year ago. Total online retail sales in the US during Amazon’s Prime Day event surpassed $11.9b. That’s 8.5% higher than overall e-commerce transactions generated during last year’s event, according to Adobe Analytics data. AMZN reports 2Q earnings on 28 Jul.
OUR VIEWS
Valuation/Recommendation. MSFT’s, GOOGL’s and AMZN’s valuations are currently reasonable vs their growth metrics. As stalwarts of the tech industry, we believe their earnings will remain resilient in the face of economic headwinds. There is concern that earnings outlooks may be cut on downward earnings revisions due to cost/margin pressures, foreign exchange headwinds. As such, we recommend investors invest via Fixed Coupon Notes with a low strike levels in the range of 75-85%.