Faith in Mega Tech's growth to be tested this week

Faith in Mega Tech’s growth is on the line this earnings season

The five largest US technology companies are set to report earnings, starting with Facebook Inc. on Monday

Representative Image. Credit: iStock Photo

By Jeran Wittenstein and Ryan Vlastelica

Investors still believe technology is the best place in the stock market to find reliable revenue and profit growth. That will be tested this week.

The five largest US technology companies are set to report earnings, starting with Facebook Inc. on Monday. They could use a strong showing, as big tech’s market dominance faces threats from rising interest rates and slowing revenues.

The stocks remain expensive. The Nasdaq 100 Stock Index is just 2 per cent from a record high despite Friday’s decline.

“It is all about the ability of these companies to deliver on earnings,” JPMorgan Asset Management strategist David Lebovitz, who helps oversee $2.7 trillion in assets, said.

There have been some high profile earnings misses, particularly Snap Inc., which plunged 27 per cent on Friday after warning that customers are cutting back on digital advertising spending. That sent shivers through the industry, as Facebook and Twitter Inc. tumbled around 5 per cent, while Google-parent Alphabet Inc. fell 3 per cent. 

Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19 per cent for the third quarter, exceeding the benchmark’s average, according to analyst estimates compiled by Bloomberg Intelligence. Among the megacaps, Alphabet is the leader at 38 per cent, followed by Facebook at 37 per cent and Apple Inc. at 31 per cent. However, the expansion is seen slowing beginning in the fourth quarter.

Jensen Investment Management portfolio manager Kevin Walkush isn’t so sure. He believes big technology companies can keep delivering strong revenues and earnings that justify their valuations. 

“These companies have pricing power, and combined with underlying growth drivers, that really helps generate high returns and reinvest in the business and perpetuate that strength,” he said in an interview.

Investors, however, are clearly skittish. So far this earnings season, 85 per cent of tech companies have beaten profit estimates, but the stocks have fallen an average of 2.4 per cent the following day.

Centre Asset Management chief investment officer James Abate thinks this is a sign that the market’s getting nervous about sky-high stock prices. The Nasdaq 100 is well above its 10-year average of 20 times profits expected over the next 12 months.

“These companies need to put up astronomical growth and improved profitability metrics in order to justify their valuations,” he said in an interview.

Here’s a closer look at expectations for the five biggest US tech companies:


The social media behemoth’s third-quarter results are due after the market closes on Oct. 25. The stock is among the worst performers in the Nasdaq 100 since the index peaked on Sept. 7, falling 16 per cent compared with about 5 per cent for Amazon, Apple and Alphabet. Investors will likely focus on how much Apple’s revamped privacy policy weighs on growth, especially after it prompted a disappointing report from Snap.

  • BofA (buy, PT $425)
    • Analyst Justin Post sees “elevated risk given reopening headwinds on usage, IDFA pressure, tougher comps, and regulatory concerns which could result in more cautious 2022 guidance”
    • Given these issues and the stock’s recent weakness, the bar is lower


Google’s parent will report third-quarter results after the market closes on Oct. 26. The stock is by far the top performer in the group, up more than 60 per cent in 2021. Wall Street is looking for revenue growth of nearly 40 per cent this quarter.

  • Credit Suisse (outperform, PT $3,400)
    • The firm expects to see “ongoing monetization improvements in search advertising through product/AI driven updates,” along with greater-than-expected contributions from businesses like YouTube and Google Cloud
    • Bloomberg Intelligence: Alphabet Still Aided by Robust Ad, Cloud Spending


The software giant also reports its first-quarter results after the market closes on Oct. 26. The stock is up almost 40 per cent this year despite a recent period of weakness related to rising bond yields. Analysts expect revenue will grow nearly 20 per cent in the quarter and for its cloud-computing business to maintain strong demand.

  • Jefferies (buy, PT $375)
    • The stock’s 2021 outperformance has set the bar higher, and while the company can deliver, revenue grew at a high-teens pace last year, which “will be hard to sustain”
    • Year-over-year comparisons “get progressively tougher throughout FY22 which should be met by MSFT’s durable growth portfolio of Azure/Security/Teams”
    • Bloomberg Intelligence: Microsoft’s Cloud, Office Sales May Remain Strong


The iPhone maker will report its fourth-quarter results on Oct. 28. Investors will be looking for clues to how the company is navigating supply-chain issues and component shortages that could threaten holiday sales. While the stock has been resilient, Apple’s 12 per cent gain this year lags the 20 per cent advance in the S&P 500. 

  • Citi (buy)
    • Expects strong iPhone sales, but component shortages are a limiting factor
    • Regulatory uncertainty is an overhang; implications of the App Store ruling remain “a wild card and to some extent overplayed”
    • Bloomberg Intelligence: Supply-Chain Woes a Major Focus of Apple Earnings

The e-commerce and cloud-computing giant will report third-quarter results on Oct. 28 as well. Investors want to know how the company is navigating supply-chain challenges and labour shortages. Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the waning pandemic-related tailwind for online retail. Revenue is expected to grow a little more than 16 per cent, the slowest pace since 2015. The stock is up less than 3 per cent this year.

  • Baird (outperform, PT $4,000)
    • There are concerns “over supply chain bottlenecks and the ability for retailers to meet consumer demand”
    • “While we still expect consensus operating margin expectations to prove a bit too optimistic near-term, we feel more comfortable with [gross merchandise volume]/revenue expectations”
    • Bloomberg Intelligence: Amazon’s Slowing Online Sales Offset by AWS Strength

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