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By Brian Nelson, CFA
Market sentiment had been improving on the back of Tesla’s (TSLA) strong fourth-quarter report and Meta Platforms’ (META) return to financial discipline, but a trio of ho-hum reports from Apple (AAPL), Alphabet (GOOG) (GOOGL) and Amazon (AMZN), released after the close February 2, have dampened enthusiasm to a degree. However, after a very weak 2022, the stock market has some ground to make up, in our view, and investors have a lot to be optimistic about. With inflation peaking in June 2022 for this part of the economic cycle, most companies generally reporting benign fourth-quarter 2022 earnings, and the largest market indices breaking out of their technical downtrends, equities still have more room to run.
- Apple reported first-quarter fiscal 2023 results that faced supply chain hurdles, weakness in China as well as foreign exchange headwinds. In November, Apple had warned that “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China.” Apple noted at the time, however, that it continues to see “strong demand for iPhone 14 Pro and iPhone 14 Pro Max models,” but that it expected “lower iPhone 14 Pro and iPhone 14 Pro Max shipments” than previously expected. We saw this dynamic show up in the quarter. Apple’s revenue declined 5.5% in the quarter on a year-over-year basis, and sales across all product categories faced pressure, with the exception of its lucrative Service business and its iPad segment. There wasn’t much to like about Apple’s first-quarter 2023 results (operating income dropped 13.2%), in our view but it’s still early in Apple’s fiscal year, and we’ll have to see how the year progresses at the company. The iPhone giant generated $30.2 billion in free cash flow in the quarter (down from the same quarter a year ago) and ended with $165.45 billion in cash and marketable securities and $109.37 billion in term debt–good for a solid net cash position. We continue to like companies that generate strong free cash flow and have large net cash positions on the balance sheet–the two primary sources of cash-based intrinsic value.
- Best Ideas Newsletter portfolio holding Alphabet’s fourth-quarter 2022 results weren’t as good as we would have liked. On a constant-currency basis, revenue advanced 7% (on a reported basis, revenue nudged higher just 1% in the period), and the firm’s operating margin tumbled roughly 5 percentage points in the quarter, to 24%. This drove net income in the quarter to $13.62 billion from $20.64 billion in the same period last year. Revenue from Google Search, YouTube ads, and Google Network all declined in the fourth quarter on a year-over-year basis, and while revenue in its Google Cloud division advanced on a year-over-year basis, the pace of the increase came in a bit light relative to expectations. The race to deliver the best AI-platform is on, and while Alphabet may have a few tricks up its sleeve with respect to AI in its ‘Other Bets’ segment, Microsoft (MSFT) seems to be emerging as the leader in this area with its investment in OpenAI’s ChatGPT, in our view. Alphabet generated $60 billion in free cash flow during 2022 (down from last year’s mark), and it ended the fourth quarter of 2022 with $139.65 billion in total cash and marketable securities and $14.7 billion in long-term debt. We continue to like Alphabet’s free cash flow generation and massive net cash position, but the firm may need to exercise more cost discipline beyond the 12,000 layoffs to get the stock moving in the right direction, particularly given the Justice Department’s recently-released antitrust lawsuit.
- Amazon’s fourth-quarter 2022 report showed better performance on the top line than Apple’s and Alphabet’s respective fourth quarters, as Amazon registered net sales growth of 8.6% on a year-over-year basis in the quarter. The company’s ‘North America’ segment sales increased 13% on a year-over-year basis, but its ‘International’ segment sales fell 8% on a year-over-year basis as foreign exchange headwinds weighed on results. Amazon Web Services (AWS) sales advanced 20% in the quarter, but the firm wasn’t able to generate much in the way of earnings, with non-GAAP earnings per share coming in at a mere $0.04 in the period. Net sales for the current first quarter of 2023 are expected in the range of $121-$126 billion (implying 4%-8% growth), but Amazon’s target for operating income of $0-$4 billion in the period suggests that profits may fall considerably from the first quarter of 2022, using the midpoint of the range. For 2022, Amazon burned through $16.9 billion in free cash flow, slightly worse than its free cash flow burn last year, and for this reason, shares aren’t being considered for inclusion in any simulated newsletter portfolio. Amazon ended the quarter with $70 billion in cash and marketable securities and $67.15 billion in long-term debt, good for a very modest net cash position.
Concluding Thoughts
Apple’s, Alphabet’s and Amazon’s calendar fourth-quarter results, released February 2, weren’t great, but we’re keeping things in context. Apple had to deal with disruptions in China during the period, while Alphabet is contending with a slowdown in advertising. Both Apple and Alphabet continue to generate tremendous amounts of free cash flow, while boasting considerable net cash positions. Alphabet’s financial profile is second to none. Amazon, on the other hand, continues to burn through free cash flow while it holds a net-neutral balance sheet. We continue to be comfortable including Apple and Alphabet in the newsletter portfolios, but we won’t be considering Amazon anytime soon. Though we expect to make a few tweaks to our valuation models of each, our fair value estimates remain unchanged at this time.
Tickerized for AAPL, GOOGL, GOOG, AMZN
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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