- As many sectors reported devastation from the economic downturn, tech companies have proven largely resilient.
- Facebook, Apple, Amazon, Netflix and Alphabet all reported strong signs that they can weather the coronavirus.
- The market has rewarded Big Tech companies for their resilience during the pandemic.
Unlike you and me, tech companies are immune to the coronavirus.
Over the last two weeks, the biggest tech companies in the world reported their quarterly earnings. And while they showed signs of pain as the coronavirus pandemic took hold on most of the world in March, investors still rewarded them for their resilience in the current economic downturn.
Facebook shares popped as much as 10% following its earnings report last week. Google’s parent company Alphabet was up 7%. Netflix reported nearly double the amount of new subscribers it had anticipated for the quarter. Apple made up for of its lost iPhone sales with digital services like App Store sales and subscriptions.
The only sour spot in Big Tech’s earnings came from Amazon, which posted less profit than anticipated as it continues to spend heavily to combat the effects of the pandemic on its shipping and logistics network.
The so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google/Alphabet), have proven to be far stronger than other industries ravaged by the pandemic. The stay-at-home orders across the world have people using technology to work remotely more than ever, providing a big boost and more optimism around technology.
Compare all that to the various other industries that have been gutted by the coronavirus. Over the weekend, Warren Buffett delivered the devastating newsthat he sold off Berkshire Hathaway’s shares in the four major airlines, for example. Retailers like Macy’s and JCPenney, which were struggling before the pandemic, are knocking on death’s door.
But Big Tech, which has expanded beyond making popular gizmos and gadgets to building the digital infrastructure the world needs to weather an unprecedented economic shut down, is looking stronger than ever.
Here’s what we learned.
Optimism in April
Facebook, Google and Apple all reported sales slumps for the month of March, but all three companies said the first few weeks of April showed signs of “stability” and possible recovery. In the digital advertising world, Facebook and Google both said sales saw steep declines in mid-March, but started to stabilize in April. Those comments excited investors, sending the stocks even higher.
Apple also said April was looking better. Its sales took a hit earlier than Facebook and Google due to Apple’s exposure in China, which went under lockdown months before the U.S. and the rest of the world. But CEO Tim Cook told CNBC Thursday that was starting to change.
“There was a significant, very steep fall-off in February. That began to recover some in March, and we’ve seen further recovery in April. So, it leaves us room for optimism,” Cook said in an interview with CNBC’s Josh Lipton last week.
Bracing for an advertising slump
Even as industries like travel drastically scale back on advertising, tech platforms that rely on digital advertising have found a new bright spot: Direct Response (DR) ads that drive people to make a purchase or download an app. Facebook, Google and Snap all pointed to DR ads as a bright spot amid a broader slump in advertising spend. Snap in particular seems in a great position to take advantage of the trend, and its stock was up 36% the day after it reported earnings.
But it was a different story for Twitter, which has had difficulty beefing up the tech infrastructure it needs for DR ads. Twitter also failed to show the same signs of recovery in April that Facebook and Google did, which punished the stock last week.
More engagement, more guesswork
You don’t see the term “guesswork” too often in earnings reports, but that’s exactly what we heard from Netflix when it reported earnings earlier in April. Netflix attributed the unexpected surge in new subscribers to people staying at home under shelter-in-place orders, but noted that it would be difficult to determine if that growth will continue as the economy starts to reopen and people get out more.
That theme was also echoed by Google and Facebook. The coronavirus had people glued to their feeds more than usual, but it’s impossible for those companies to determine whether or not that increased engagement will stick throughout the year. And because advertisers are pulling back, more engagement doesn’t necessarily translate to more money.
Share buybacks continue, despite criticism
Google and Apple continue to buy back billions of dollars worth of shares each quarter, even as criticism mounts over the practice. Apple alone said it’d buy back $50 billion more of its shares.
But unlike companies in other sectors that have spent the last few years buying back massive amounts of shares instead of saving that cash for a downturn, Google and Apple still have plenty of cash on hand to justify their buyback programs. Plus, they’re not laying off or furloughing workers, and they’re not asking the government for loans. It’s hard to make an argument against Google and Apple’s buybacks given how well positioned they still are to make it through the coronavirus pandemic.
Apple holds firm in China
Apple was the first major tech company to issue a formal warning on its earnings due to the coronavirus pandemic, which shut down most of China early in the year. In its revised guidance in February, Apple said it saw decreased demand and hangups in its supply chain.
But despite a 7.5% decline in revenue from China last quarter, Apple said it was able to make up for it thanks to a spike in sales of digital services like Apple Music subscriptions and App Store sales.
Apple has massive exposure in China, relying on the country to manufacture its product and boost its sales. The company has spent the last year and change rebuilding its China business, and was able to stave off a major downturn despite the effects of the pandemic. Meanwhile, Apple Stores in China are already open again, and the country will likely serve as a blueprint for Apple as it reopens stores in the U.S. and beyond.
Still ‘Day One’ for Amazon
Amazon is famous for reinvesting profits back into the company, but in recent years it’s shown an ability to regularly post strong quarterly profits thanks to its cloud division, Amazon Web Services (AWS), which booked more than $10 billion in quarterly revenue for the first time.
But Amazon sees the pandemic as an opportunity, not a time to retreat.
Amazon warned in its earnings release last week that it plans to reinvest an expected $4 billion in profit this quarter into its Covid-19 response, which includes beefing up its delivery network to get it back to normal and provide Covid-19 testing for employees so they can safely return to work. In fact, Amazon said it plans to spend at least $1 billion this year on testing alone.
Don’t take that as a sign that Amazon is in trouble. The company is playing by its old rule book, using the opportunity to invest billions more into the company to come out the other side of the pandemic stronger than ever.
So, what makes Big Tech so resilient against Covid-19?
As tech has taken a bigger hold on media, shipping and retail, it’s built an essential digital infrastructure on top of an aging system. Video chat services, new devices, cloud computing and more have literally kept what remains of our devastated economy humming in a way that would’ve been nearly impossible during the last financial crisis.
Despite all the antitrust heat and other criticism that has plagued the industry for the last few years, it’s in a better position than anything else to come out the other side of the pandemic bigger, stronger and more important to the way we live.