Amazon Says Profits Could Disappear And Apple Facing ‘Significant’ Headwinds In Q4

Key Takeaways

• Amazon grew revenue 15% in Q3, but predicts its profits could be zero in Q4.
• Apple is also expecting a drop in revenue in Q4, with major impacts being felt from the continued strength of the US dollar.
• The negative outlook has caused a further selloff in tech stocks, with Amazon’s share price down as much as 20% in after hours trading.
• Despite the short term volatility that is expected, 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 for the general health of the economy. That’s because generally when a public company releases their figure from the past quarter or year, they also provide guidance on what the next quarter or year is going to look like.

Because of this cycle, the performance of a company’s share price can seem a bit detached from it’s financial performance.

If a company forecasts earnings per share of $1, and then three months later they announce earnings per share of $1, the stock might not move much. Those earnings may be a great result, but the stock will have generally been priced based on the expectation that the company would hit their numbers.

And if the forecast is a bit of a downer even after a positive result, the stock can move in relation to that projection more than the concrete numbers.

It’s how we end up in a bizarro world where Amazon can grow revenue by 15% from last year and then see their stock price fall by almost 20%. Or how on the very same day, Apple can announce numbers basically exactly in line with forecasts, and see their stock price go up.

The stock market is particularly sensitive to forecasts right now because everyone keeps banging on about a recession. Even though we’re not in one yet (officially) we’re at the point where if it does happen, every CEO and analyst on Earth will be able to claim they ‘called it’.

Regardless, if there were two companies that could provide the most insight into consumer behavior and expectations for the coming year, it would be Amazon and Apple. Let’s look at how they fared in Q3 and analyze the messages to take from their forecasts.

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Amazon earnings forecast smashed but the stock price has crashed

It was a tale of two quarters for the Amazon announcement, with a reasonably positive outcome for Q3 overshadowed by a very gloomy outlook for Q4.

Revenue for Q3 was up by 15% compared to this time last year and while most businesses would consider this a major win, it didn’t count for Amazon as it was slightly behind analyst expectations. The final figure for Q3 for the company was $127.1 billion against forecasts of $127.46 billion.

Revenue for Amazon Web Services was behind target at $20.5 billion compared to the forecast figure of $21.1 billion, whereas advertising was ahead of expectations at $9.55 billion against $9.48 billion.

Despite the slight miss on overall revenue, earnings per share recorded a big beat at $0.28 against a forecast of $0.20.

These figures alone almost certainly don’t justify a major sell off that saw Amazon stock fall almost 20% at point overnight, but it was the forward guidance that’s spooked (pun intended) the markets.

While we’re all in the mood for something scary at this time of year, it’s clear that this doesn’t extend to investors. Amazon’s chief financial officer Brain Olsavksy stated that “This is uncharted waters for a lot of consumer’s budgets” and that they were likely to see a major slowdown in spending.

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

In terms of figures, Amazon has projected Q4 revenue to land between $140 billion and $148 billion, which is significantly down from prior analysts estimates which have been projecting strong holiday days and final figures in the region of $155 billion.

Even worse, the profit on these sales could fall to $0, with Amazon suggesting a range of between zero and $4 billion against analyst forecasts of $5 billion in Q4.

The negative outlook saw Amazon stock fall as much as 20% in after hours markets, though it recovered slightly to be down around 13%.

Apple forecasts not as dire but still cautious

While Amazon seems to have turned the doom dial up to 11, Apple is hovering around a 7.5. Their revenue was up 8% compared to this time last year, hitting $90.1 billion against an estimate of $88.9 billion. Good news so far.

Earnings per share were also up, gaining 4% to hit $1.29, slightly higher than 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 around a ten percentage point hit to company revenue as a result. With the US dollar rising against most major currencies in the world, sales of iPhones and App Store revenue from other parts of the world such as the UK and Europe convert back to fewer US dollars, impacting the bottom line.

Maestri also stated that “Total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter.”

That’s not great news, but it’s much softer messaging than the Amazon projection that their Q4 profits could be wiped out completely.

Mac revenue in particular is expected to slow on a year on year basis, due in part to the fact that there will be no new lineup announced in Q4 2022. Last year saw the release of the M1 Pro and M1 Max Macbooks in October, leading to a strong performance for the Mac division in the lead up to Christmas.

While there are rumors of new versions of these Macbooks being released before the end of 2022, they are expected to be simple updates without a change of design, rather than brand new machines.

The middling results made for a muted response to the stock price. It fell 5% initially but pared back all of those losses to finish up almost 1% in after hours trading.

How investors can approach tech right now

Big Tech has been the darling of most investors’ portfolios over the past couple of years. There have been record prices, record profits and seemingly never ending sources of revenue and growth. That’s all changed now. Most likely not forever, but investing in tech is no longer a case of throwing a dart at a board and seeing your portfolio go to the moon.

The tech sector remains the most dynamic in the world and will continue to be the growth engine for the global economy for the foreseeable future. With that said, making profits now needs a more sophisticated approach.

In our view, using AI is the best way to do that. There is simply too much data and information available now for us humans to be able to assess and decipher all of it in a timely way. 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 which are based heavily on market segments or themes. When it comes to tech, we’ve got our Emerging Tech Kit, which looks to invest in the best ideas in tech, rebalancing on a weekly basis.

We use AI to predict the returns for the coming week across four verticals. Large tech companies, small tech companies, tech ETFs and cryptocurrencies via public trusts. The AI looks at multiple data sets to predict the return and volatility for each of these verticals, and then automatically rebalances the Kit with the aim to achieve the best risk-adjusted returns every week.

Because this is a Foundation Kit, investors can also choose to add Portfolio Protection. This is another layer of AI which looks at the portfolio’s sensitivity to different types of risks, such as interest rate risk, oil risk, and overall market risk. With that information, it then automatically implements sophisticated hedging strategies which aim to reduce the overall volatility of the portfolio.

It’s like having a highly paid hedge fund manager right there in your pocket.

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