Big Tech's Best Growth Days May Be Behind It
This might be a very odd claim to make after seeing Amazon (AMZN), Alphabet (GOOGL), Apple (AAPL), Facebook (FB) and Microsoft (MSFT) report results in recent days that can only be described as blockbuster.
I don’t think we need to dwell on how good the quarterly numbers from these ‘Big Tech’ players have been, but let me take a moment to present the sales and earnings numbers for just two of these five players – Amazon and Apple.
Amazon’s Q1 earnings of $8.1 billion on $108.5 billion in revenues not only topped consensus estimates, but represented year-over-year growth rates of +219.8% and +43.8%, respectively. In other words, just the change from the year-earlier period amounted to $5.6 billion in earnings and more than $33 billion in revenues. On the other hand, the iPhone maker earned $23.6 billion on $89.6 billion in revenues, representing year-over-year growth rates of $110.1% and $53.6%, respectively.
Needless to say, these are mindbogglingly big numbers.
Looking at this elite group of five ‘Big Tech’ players as a whole, these companies earned $74 billion in earnings in the March quarter on $311.6 billion in revenues. This group’s Q1 earnings and revenues are up +104% and +29% from the year-earlier period, respectively.
So are we claiming that this group’s best growth days may be behind it?
Our sense is that this is probably as good as it ever will get, with the growth trajectory steadily decelerating going forward.
Take a look at the chart below that shows current consensus expectations for this group in the context of what they were able to achieve in 2021 Q1 and the preceding period.
It is reasonable to assume that these estimates will go up as we move forward, with 2021 Q4 and 2022 Q1 significantly above what is currently expected. Given the history of these companies and their enormous earnings power, they will likely continue to have positive earnings growth, but not the preceding period’s +41.2%, Q1’s +104% or even the June quarter’s +35.8%.
In other words, they will continue to have positive earnings growth, but not the type of growth we have become used to seeing in recent periods.
Beyond the big 5 Tech players, total Q1 earnings for the Technology sector as a whole are expected to be up +50.3% from the same period last year on +23.4% higher revenues. The chart below shows the sector’s Q1 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.
This big picture view of the ‘Big 5’ players as well as the sector as a whole shows a decelerating growth trend. That said, unlike this ‘quarterly view’, the annual picture shows a lot more stability, as the chart below shows.
Q1 Earnings Season Scorecard (As of Friday, April 30th)
We now have Q1 results from 302 S&P 500 members or 60.4% of the index’s total membership. Total earnings (or aggregate net income) for these 302 companies are up +51.1% from the same period last year on +8.3% higher revenues, with 86.1% beating EPS and 77.8% beating revenue estimates.
We remain in the heart of the Q1 reporting cycle this week, with more than 1200 companies on deck to report results, including 140 S&P 500 members. By the end of this week, we will have seen Q1 results from more than 88% of the index’s total membership.
The two sets of comparison charts below put the Q1 results from these 302 index members in a historical context, which should give us a sense how the Q1 earnings season is tracking at this stage relative to other recent periods.
The first set of comparison charts compare the earnings and revenue growth rates for these 302 index members.
The growth comparison is likely not fair, given the unusually high year-over-year growth rates in the Finance sector, a function of big reserve releases and easy comparisons in 2021 Q1.
The Finance sector still remains a big factor in the outsized Q1 earnings growth rate, even though the aforementioned ‘Big Tech’ numbers are no less outstanding. On an ex-Finance basis, the Q1 earnings growth for the remaining companies that have reported results drops to only +35.1%.
But even on an ex-Finance basis, the Q1 earnings growth rate still compares favorably to other recent periods, as the chart below shows.
The second set of charts compare the proportion of these 203 index members beating EPS and revenue estimates.
Overall Expectations for 2021 Q1
Looking at Q1 as a whole, combining the actual results that have come out with estimates for the still to come companies, total earnings for the S&P 500 index are expected to up +42.6% on +6.8% higher revenues.
Part of the strong growth in Q1 is reflective of easy comparisons, as the last month of 2020 Q1 was weighed down by the pandemic, though the full impact showed up in Q2. Those easy comparisons are notable for the Finance, Consumer Discretionary, Transportation and Energy sectors. Profitability in these sectors is notably above the Covid-hit levels of the year-earlier period, but they are still below the comparable period in 2019 (2019 Q1), except for the Finance sector.
But it isn’t just easy comparisons that is giving us the strong aggregate growth in 2021 Q1. A number of sectors, including the all-important Technology sector, are on track to produce genuine growth, i.e., 2021 Q1 profitability growth above pre-Covid levels. These include, in addition to Technology, Construction, Medical, Basic Materials, Consumer Staples and Utilities.
The table below shows summary expectations for 2021 Q1, contrasted with what was actually achieved in 2020 Q4.
The chart below takes a big-picture view of the quarters, showing Q1 earnings and revenue growth highlighted and shown in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.
The chart below shows quarterly earnings totals or quarterly aggregate net income, instead of year-over-year growth rates. This gives us a better appreciation of the pandemic’s earnings imapct and the resulting easy comparisons that are helping the growth rate in Q1 (and even ‘bigly’ in Q2).
That said, the 2021 Q1 total at $415.4 billion is a new all-time quarterly record.
The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +28.3% and +8.8%, respectively, which follows the Covid-driven decline of -13.1% in 2020.
On an index ‘EPS’ basis, the 2021 expectation works out to $175.64, up from $136.93 per ‘Index share’ in 2020.
These full-year estimates have been going up as well, as the chart below shows.
We envision this favorable revisions trend to accelerate over the next few months as the vaccination effort reaches a critical mass and greater ‘normalcy’ returns to life.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>The Tech Sector Money Machine
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