Amazon says profits could disappear and Apple faces “significant” fourth-quarter headwinds

Key points to remember

  • Amazon increased revenue 15% in the third quarter, but expects fourth-quarter profit could be flat.
  • Apple also expects revenue to decline in the fourth quarter, with major impacts felt by the continued strength of the US dollar.
  • The negative outlook prompted a further sell-off in tech stocks, with Amazon’s share price falling 20% ​​after hours trading.
  • Despite the expected short-term volatility, Big Tech remains an attractive long-term option for investors who allocate their funds in the right way.

The stock market is known as a leading indicator of the general health of the economy. Indeed, usually when a public company releases its figures for the last quarter or year, it also provides indications of what the next quarter or year will look like.

Because of this cycle, a company’s share price performance can seem a little disconnected from its financial performance.

If a company forecasts earnings per share of $1, and then three months later reports earnings per share of $1, the stock might not move much. Those earnings can be a great result, but the stock price will usually have been priced on the expectation that the company would hit its numbers.

And if the forecast is a bit down even after a positive result, the stock may move against that projection more than the actual numbers.

And so we find ourselves in a bizarre world where Amazon can increase its revenue by 15% over last year and then see its stock price drop by almost 20%. Or how on the same day, Apple can report numbers mostly in line with forecasts and see its stock price rise.

The stock market is particularly sensitive to forecasts right now because everyone keeps talking about a recession. Even though we’re not there yet (officially), we’re at the point where if that happens, every CEO and analyst on Earth will be able to claim they “called” it.

Either way, if there were two companies that could provide the best insight into consumer behavior and expectations for the year ahead, it would be Amazon and Apple. Let’s take a look at how they fared in Q3 and analyze the takeaways from their predictions.

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Amazon’s earnings forecast crashed but the stock price crashed

It was a two-quarter story for Amazon’s announcement, with a reasonably positive third quarter result overshadowed by a very bleak outlook for the fourth quarter.

Third quarter revenue was up 15% from the same period last year and while most companies consider this a major win, it didn’t count for Amazon as it was slightly behind the analysts’ expectations. The final third-quarter figure for the company was $127.1 billion versus a forecast of $127.46 billion.

Amazon Web Services revenue was below target at $20.5 billion from the forecast figure of $21.1 billion, while advertising was ahead of expectations at $9.55 billion. dollars versus $9.48 billion.

Despite the slight decline in overall revenue, earnings per share recorded a big beat at $0.28 versus a forecast of $0.20.

Those numbers alone certainly don’t justify a major sell-off that saw Amazon shares plummet nearly 20% overnight, but it was the forecasts that spooked (pun intended) the markets.

While we’re all in the mood for something spooky this time of year, that clearly doesn’t extend to investors. Amazon Chief Financial Officer Brain Olsavksy said “these are uncharted waters for many consumer budgets” and they risk seeing a major downturn in spending.

As consumers battle high levels of inflation and soaring energy prices, there is potentially less money in the bank for non-essential spending.

In terms of the numbers, Amazon forecast fourth-quarter revenue to be between $140 billion and $148 billion, significantly lower than previous estimates from analysts who forecasted strong holiday days and final numbers. order of 155 billion dollars.

Worse still, profit on those sales could fall to $0, with Amazon suggesting a range of zero to $4 billion from analysts’ forecasts of $5 billion in the fourth quarter.

The negative outlook saw Amazon shares fall as much as 20% in after-hours markets, although they recovered slightly to fall around 13%.

Apple predicts less dire but still cautious forecast

While Amazon seems to have turned the doom dial up to 11, Apple hovers around a 7.5. Their revenue rose 8% from the same period last year, reaching $90.1 billion from an estimated $88.9 billion. Good news so far.

Earnings per share also rose, gaining 4% to $1.29, slightly above the $1.27 that had been forecast by analysts.

Chief Financial Officer Luca Maestri commented on the significant impact of the strong US dollar, attributing a drop of around ten percentage points to company revenue as a result. With the rise of the US dollar against most of the world’s major currencies, iPhone sales and app store revenue from other parts of the world such as the UK and Europe are converting to less US dollars, which has an impact on net income.

Maestri also said that “the company’s total year-over-year revenue performance will slow in the December quarter compared to the September quarter.”

That’s not good news, but it’s a much softer message than Amazon’s projection that their fourth-quarter earnings could be wiped out completely.

Mac revenues in particular are expected to slow year-over-year, in part due to the fact that no new lineups will be announced in Q4 2022. Last year saw the release of the M1 Pro and M1 Macbooks. Max in October, leading to a strong showing for the Mac division heading into Christmas.

Although there are rumors that new versions of these Macbooks will be released before the end of 2022, they should be simple updates with no design changes, rather than brand new machines.

The lackluster results resulted in a muted response during action. It fell 5% initially, but pared all of those losses to end nearly 1% after hours trading.

How Investors Can Approach Tech Now

Big Tech has been the darling of most investors’ portfolios for the past two years. There have been record prices, record profits, and seemingly endless sources of revenue and growth. Everything has changed now. Probably not forever, but investing in tech is no longer about throwing a dart at a board and watching your portfolio go to the moon.

The technology sector remains the fastest growing in the world and will continue to drive growth in the global economy for the foreseeable future. That said, making profits now requires a more sophisticated approach.

In our opinion, the use of AI is the best way to achieve this. There is simply too much data and information available right now for us humans to assess and decipher in a timely manner. Like many aspects of our lives, we can use technology to help us.

We use AI and machine learning to manage investment kits for investors that are heavily based on market segments or themes. On the tech side, we have our Emerging Tech Kit, which seeks to invest in the best tech ideas, rebalancing weekly.

We use AI to predict returns for the coming week in four vertical markets. Big tech companies, small tech companies, tech ETFs and cryptocurrencies via public trusts. The AI ​​looks at multiple sets of data to predict the return and volatility of each of these verticals, then automatically rebalances the kit in an effort to achieve the best risk-adjusted returns each week.

As this is a basic kit, investors can also choose to add portfolio protection. This is another layer of AI that examines the portfolio’s sensitivity to different types of risk, such as interest rate risk, oil risk, and overall market risk. With this information, it then automatically implements sophisticated hedging strategies that aim to reduce the overall volatility of the portfolio.

It’s like having a well-paid hedge fund manager in your pocket.

Download today to access AI-powered investment strategies. When you deposit $100, we add an additional $100 to your account.

About Kristina McManus

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