Meta’s revenue—almost entirely Facebook and Instagram ads—jumped 11% in the second quarter, up from 3% in the first. That’s after a decline in 2022.
DreamstimeSo far, so good.
We’re in the thick of second-quarter earnings season, and results so far have matched the hype. Tech stocks were flying in the year’s first half, with the Nasdaq Composite up 32% as the sector’s largest players posted huge gains. There were at least three contributing factors to the rally: the emergence of generative artificial-intelligence applications, a “year of efficiency” focus on cost cuts and profitability, and growing confidence that the Federal Reserve’s tightening cycle was nearing completion.
The missing ingredient was earnings and revenue growth, but now there are signs of optimism there, too.
The past week brought earnings reports from three of tech’s most important players, Microsoft (ticker: MSFT), Alphabet (GOOGL), and Meta Platforms (META). Next week, Apple (AAPL) and Amazon.com (AMZN) follow. Here are a few thoughts on what we’ve seen so far—and what’s coming around the bend.
Ads are hot: In previewing this quarter’s batch of earnings reports, I noted that analysts were picking up on clues that the digital ad market had improved, setting up both Alphabet and Meta Platforms for strong quarters. They both delivered.
Alphabet reported 5% year-over-year growth in Google search ads, and 4% growth in YouTube ads, accelerating from zero growth on both fronts in the first quarter. Meta’s revenue—almost entirely Facebook and Instagram ads—jumped 11% in the second quarter. That’s up from 3% growth in the first quarter, and a 1% decline for all of 2022. Meta’s third-quarter guidance implies up to 25% revenue growth, the fastest pace in two years.
Meta’s strong results go beyond a better spending environment. It is gaining traction in monetizing Reels, the TikTok-style short video feature on Facebook and Instagram. CEO Mark Zuckerberg said Reels is generating more than $10 billion in annual run-rate revenue, up from $3 billion in the fall.
Strength in the ad market could play a role in both Apple and Amazon results, which are both due on Aug 3. Apple doesn’t break out its advertising revenue, but it’s a growing ingredient in the company’s Services line. Amazon’s ad business has been growing even faster than its Amazon Web Services, generating $40 billion in annual revenue. Expect a strong second quarter there.
The future looks cloudy: Cloud-computing spending growth has decelerated in recent quarters, as customers focused on optimizing their outlays, getting smarter about buying cloud computing and storage. Analysts think that process is nearing completion, and there were positive signs on that score in recent results, foreshadowing good news for Amazon’s AWS.
Microsoft’s cloud growth rate slumped from 51% in the June 2021 quarter to 26% in the latest quarter. The good news is that Microsoft sees September-quarter growth of 25% to 26%, including two percentage points from work on AI-related projects, flat with the second quarter. Meanwhile, Microsoft expects capital spending on cloud- and AI-related infrastructure to increase sequentially in each of the four quarters of its June 2023 fiscal year. Bears see growing expenses. Bulls see signs cloud demand is just getting started, with AI projects accelerating.
Google Cloud growth in the second quarter was 28%, flat with the first-quarter rate after several periods of slowing growth—and it turned profitable for the first time. AWS has been growing more slowly—consensus estimates call for 10% growth in the June quarter, down from 37% two years ago. But Amazon has a growing collection of AI tools to offer, and bulls think cloud growth will accelerate from here. If AWS results are strong and commentary on the outlook is bullish, Amazon stock should rally.
Retail therapy: Aside from the cloud and ads, the other key to Amazon’s quarter will be its core retail business. Amazon recently wrapped a successful Prime Day sales event, selling 375 million items, up from 300 million a year earlier. While the July event won’t be reflected in the latest results, it’s a sign that second-quarter retail results should be robust. Wall Street is looking for 6.5% online stores growth, after a slight year-over-year decline in the prior quarter.
Blemishes: Meta stock was up 4.4% after a strong earnings report, suggesting that investors are ignoring the mammoth losses in Reality Labs, Meta’s virtual-reality and metaverse business. The unit lost $3.7 billion in the second quarter alone, following a $4 billion loss in the first quarter. Meta expects losses to increase substantially in 2024. If Zuckerberg really wants to be efficient, he should do something about the hemorrhaging in the metaverse.
Microsoft seems poised to reap substantial returns from its investment in artificial-intelligence software in the coming quarters and years. But before it gets there, it will have to navigate through what remains a terrible environment for PCs—the company’s September-quarter forecast for its “More Personal Computing” segment came in well short of estimates.
Crab Apple: Apple is poised for a revenue decline in its latest quarter, which raises the obvious question of when the company will grow again. Bulls hope iPhone sales outperform—and that the Services segment tops estimates, perhaps driven by better ad revenue. Lower chip prices could boost margins, and the dollar headwinds are becoming tailwinds. But we’ll get no info on what could be the next drivers for Apple: Vision Pro mixed-reality goggles won’t ship until next year, the iPhone 15 is still months away, and a rumored AI push isn’t going to be announced on earnings day.
Apple has the biggest market cap, but at the moment it has the dullest story to tell in Big Tech.
Write to Eric J. Savitz at eric.savitz@barrons.com
