Tech stocks to buy after wild week of earnings

Amazon shares rose nearly 14% on Friday after the company reported strong earnings and announced it was raising the price of its Prime membership for the first time since 2018.

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Tech investors just survived what might be the most tumultuous earnings streak we’ve ever seen.

Tech Megacaps—


Alphabet

(symbol: GOOGL),


Amazon.co.uk

(AMZN),


Apple

(AAPL),


Metaplatforms

(FB), and


Microsoft

(MSFT) – are among the most scrutinized institutions in the world. Investors, analysts, journalists and legislators dig, push, test and study companies down to a microscopic level. And yet this quarter, each of them managed to surprise. Facebook’s parent Meta Platforms dragged the broader market down on Thursday after its weak report, only to see shares rescued a day later by impressive growth at Amazon.

Now that we’ve had a few minutes to breathe, here are some thoughts on the crazy tech week:

Amazon’s diversification strategy is paying off: This is the quarter where Amazon has clearly demonstrated that it is much more than an e-tailer. Its Amazon Web Services cloud business is booming – arguably a more valuable (and far less cyclical) business than the company’s former e-commerce arm. It’s no coincidence that founder Jeff Bezos chose Andy Jassy, ​​who built and led AWS, to succeed him as CEO.

But there is more to the quarter. Amazon’s ad business generated $10 billion in sales over the past period, after doubling in just over a year. It now generates more advertising dollars than Google’s YouTube. People come to the Amazon store with intent – no matter what you are looking for, you will see an assortment of sponsored listings, i.e. advertising. I did a search for “stapler”, just to prove the point, and the results included over a dozen sponsored ads.

Amazon’s third-party services business, meanwhile, now has an annual run rate of more than $120 billion. The company has become a go-to channel for sellers of all kinds, thanks to its warehousing and delivery services.

Amazon has built one of the most efficient logistics networks in the world. According to some analyst estimates, Amazon will deliver more packages this year than $200 billion in market value.


United Parcel Service

(UPS). Even after Friday’s 14% rally, Amazon shares are still down year-to-date, following a minimal gain in 2021. The stock looks like a bargain.

You cannot overestimate the importance of cloud computing: One of the biggest themes of the past two weeks is that the cloud businesses of Amazon, Microsoft, and Alphabet continue to improve. All three performed better than expected. Microsoft reported 46% growth for its Azure business in the December quarter and forecast even faster growth in the March quarter. Google Cloud revenue grew 45% for the second consecutive quarter. And AWS helped offset weakness in Amazon’s core e-commerce business, with revenue growth dropping from 39% to 40%, accelerating for the fourth consecutive quarter. The cloud branches of these three giants are the best enterprise IT companies in the market.

Raising the Bids: Amazon last week raised the monthly rate on Amazon Prime by 15% for monthly payers to $15.99; the annual subscription will see a 17% increase to $139. The company last raised the Prime subscription rate in 2018, and labor and delivery costs are rising, so a price hike seems rational.

The move comes just weeks after


netflix

(NFLX) has instituted a price increase for its subscribers in the United States and Canada. It will be interesting to see consumer reaction, but I suspect the elasticity is high – the services are valuable and there are no easy substitutions.

The price increases indicate how confident Amazon and Netflix are about their subscriptions. Here’s a little perspective:


New York Times

(NYT), which in recent weeks announced deals to acquire sports news site The Athletic and popular word game Wordle, has set a target of 15 million total subscribers by 2027. Amazon and Netflix each have over 200 million subscribers.

Spend smart: Alphabet declared a 20-to-1 stock split last week, which will bring the stock price down to around $150. But what they don’t do is pay real dividends. They should. The company has $140 billion in cash and cash equivalents; it generated $18.6 billion in free cash flow last quarter.

Meta just pointed out the risks of choosing buybacks over dividends. Facebook’s parent company has repurchased $33 billion in stock in the past two quarters alone. Considering Meta’s sell off last week, that money has essentially been burned. If the company had instead declared a special dividend, it could have paid shareholders nearly $14 per share.

Deconfinement is not over: The underlying issues that have plagued tech stocks for months are still in place. Interest rates will rise further. Fleas remain rare. Inflation is uncomfortably high. Market appetite for speculative securities is weak. There’s a reason the best-performing tech stocks so far this year are cheap — old-school names like


vmware

(VMW), Hewlett Packard Enterprise (HPE), Dell Technologies (DELL) and


IBM

(IBM).

Over the past two weeks, we’ve learned that the market likes consistency more than ever. That’s what made Meta’s earnings and outlook so troubling last week: Facebook is no longer the reliable model investors have come to expect. But the rest of Big Tech still does the trick. Apple and Microsoft have consistently exceeded expectations with the products customers are looking for. And you can say the same for Google and Amazon. Once again, Big Tech was the winner of the earnings season.

Write to Eric J. Savitz at [email protected]

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