Huge Silver Liners under Amazon and Apple Profit Disappointments

Shares in Apple (NASDAQ: AAPL) and Amazon.com (NASDAQ: AMZN) has not had a strong earnings season, with both companies falling about 2% the day after their respective third quarter reports. These declines also came on the heels of each stock’s year-to-date underperformance against the S&P 500 – a sluggish year for each.

So are these two behemoths running out of steam? Not likely. In fact, both stocks fell much more immediately after the reports before recouping some of Friday’s losses. This is probably because as investors delved into the details of each report, they were likely to find a great silver lining for each.

The power of Amazon cloud computing helped offset weakness in retail. Image source: Getty Images.

Amazon: headwinds in retail, but cloud computing takes off

Amazon missed its revenue and profit estimates, and its forecast for the fourth quarter was also lower than expected. The core business of retailing is currently plagued by supply chain and labor shortages, which are hurting not only the revenue side but also the cost side. It was also the first full quarter since vaccines became widely available, and US consumers have clearly started to venture outside to buy more and more.

Against tough comparisons, Amazon has consistently seen year-over-year growth in its online stores, which grew 3%, and third-party seller services grew 18%. But labor shortages have led to an increase in signing bonuses, and Amazon also continues to build massive capacity as it seeks to complete its one-day delivery project started in 2019. This has resulted in a profit decline by about half compared to last year.

But the performance at Amazon Web Services was a huge plus. While the e-commerce business still accounts for the bulk of Amazon’s revenue, AWS is arguably Amazon’s most valuable. Business due to its high profit margins and strong growth. In the last quarter, AWS released some fantastic numbers: Revenue accelerated by 39%, compared to 37% growth in the second quarter and 29% in the previous year quarter. AWS operating margins also increased two percentage points from the previous quarter to 30.3%, showing impressive operating leverage.

So while Amazon’s numbers are lower than expected, AWS’s strength may actually be more important to the overall stock value. Amazon is also using AWS profits to fund its overnight and same-day delivery deployments. Once this project is completed and supply and labor shortages will ease in 2022 or 2023, e-commerce is also expected to rebound.

With AWS looking stronger than ever and ecommerce issues likely to be temporary, Amazon’s lagging stock is expected to rebound over time.

Close up of hands using a smartphone with animations around.

Apple customers are using more and more services. Image source: Getty Images.

Services are the apple of this investor’s eye

Meanwhile, Apple’s “miss” was also hiding very good news in the important service segment. Overall, Apple lacked revenue, while earnings per share were in line with expectations. The culprit was supply chain disruption, not demand, as CEO Tim Cook described $ 6 billion in unrealized revenue resulting from COVID manufacturing disruptions in Asia, followed by chip shortages. for certain material elements. Adding $ 6 billion to revenue would have largely exceeded expectations, as overall revenue only missed about $ 1.5 billion.

Underlying strength was bolstered by the booming services division, which grew 25.6% year-over-year, ahead of expectations, while all categories of Apple hardware , with the exception of iPads, have missed expectations. The strength of the services is a huge advantage, as these revenues tend to be recurring in nature, as opposed to hardware sales, which are subject to cyclical ups and downs.

Not only does the strength of the services portend more sustained growth to come, but it also shows Apple’s success in expanding its brand into new areas, such as streaming TV, with Ted lasso sweeping this year’s Emmys, to payments, fitness and health, gaming and other areas of consumer spending.

So while Cook warned that the fourth quarter would also be affected by the supply chain to an even greater degree, Apple’s brand looks stronger than ever. This means that demand is expected to rebound once shortages are corrected in 2022 or 2023, and in the longer term, Apple’s brand extensions in various services are also expected to produce nice incremental growth.

Amazon and Apple investors should hold on

While Apple and Amazon disappointed this quarter and could very well disappoint in the December quarter as well, both brands appear stronger than ever, even as supply and labor shortages are out of control. management weigh on the current figures.

If their stock weakness persists, dumb long-term investors may want to consider picking more of these big, large-cap tech names over the long term.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Billy Duberstein owns shares in Amazon and Apple. Its clients may own shares of the companies mentioned. The Motley Fool owns shares and recommends Amazon and Apple. The Motley Fool recommends the following options: January 2022 long calls at $ 1,920 on Amazon, March 2023 long calls at $ 120 on Apple, January 2022 short calls at $ 1,940 on Amazon, and short calls March 2023 at 130 $ on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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