Big Tech Q3 2020 – Pandemic powered.

Big tech is being driven by deficit spending.

• Big Tech continued to benefit from the huge increases in government spending during Q3 2020 but the fact that bail-outs can’t go on forever while the pandemic grinds on, caused them to sound a note of caution on the Q4 2020 and FY 2021 outlook.

Apple FQ4 2020

• Apple reported good results but a 29% collapse in Chinese revenues shook the rose-tinted glasses from the market’s view of the shares.
• FQ4 2020 revenues / EPS were $64.7bn / $0.73 ahead of consensus of $63.7bn / $0.70 and the company declined to provide guidance for the coming quarter due to the pandemic.
• iPad and Mac both outperformed thanks to the stay-at-home trend and made up for the iPhone weakness.
• Apple is hoping that the upgrade cycle to 5G is going to trigger a super cycle of replacement, but I have my doubts.
• I think that most users don’t care that much about 5G because it is not going to make a meaningful difference to their digital smartphone experience for some time to come.
• Consequently, the iPhone 12 will sell on its merits which are solid screen upgrades, better durability and materials, a faster processor and better camera performance.
• These are good upgrades I don’t think anything like enough to generate the revenues and profits that the valuation demands.
• I still can’t find value in Apple.

Facebook Q3 2020

• Facebook reported excellent Q3 2020 results defying the big advertisers pulling out and cementing its place for small businesses to reach their customers.
• Q3 2020 revenues / EPS were $21.5bn / $2.71 well ahead of consensus at $19.8bn / $2.19.
• These results once again underline that until users start to vote with their feet, all the criticism and negative press means very little.
• These numbers were driven by the general rebound in the economy in Q3 2020 as small businesses came back to life, but the outlook is uncertain once again as Europe and other regions plunge back into lockdown for the winter.
• Facebook is cheaper than Apple at 25.4x 2021 PER and given that its revenue exposure is more geared towards usage which is growing rather smartphone sales which are declining, I would prefer to own this one if I had to choose between the two.

Amazon Q3 2020

• Amazon reported excellent Q3 2020 results and guided strongly for Q4 2020 as the pandemic continued to accelerate the shift to online spending.
• Q3 2020 revenues / EPS were $96.1bn / $12.37 which was well ahead of estimates of $92.5bn / $7.38.
• For once, all three divisions of Amazon pulled together with margin improving in North America and at AWS and with International finally reporting a profit.
• This is what really drove the better than expected profitability.
• I view this as a very good sign and it is making Amazon’s crazy valuation look much more reasonable.
• Looking at 2021 and 2022 consensus EPS, Amazon is now cheaper than Google, Facebook and Apple on 23.5x and 18.0x respectively.
• The issue of course is the risk to those earnings as Amazon has a habit of deciding not to make money and returning to a very low level of profitability.
• This is apparent in the guidance where the revenue expectations are ahead at $112bn – $121bn ($116.5bn) but the EBIT forecast ($1.0bn – $4.5bn ($2.75bn)) is well behind consensus of $4.3bn.
• This is where the risk lies in Amazon and the shares are pricing in steady profit generation with no sudden slips.
• As a value investor, I am warming up a bit to Amazon, but I would still not want to buy it.

Alphabet Q3 2020

• Google reported excellent results as the economic bounce in Q3 2020 brought back advertisers which were supported by steady growth at its nascent cloud offering.
• Q3 2020 revenues / EPS were $46.2bn / $11.39 beating consensus estimates of $42.8bn / $11.18.
• The search business has returned to YoY growth after contracting in Q2 2020 which was well received and sent the shares up 9% in after-hours trading.
• The results were also helped by the slowdown in hiring which is typically strong at this time of year which results in much lower expense growth compared to revenues.
• Alphabet has also committed to greater transparency going forward but continues to stop short of fixing its poor corporate governance.
• Going into Q4 2020 and 2021, the outlook is very uncertain as the general economy will take another hit as more lockdowns appear although I expect them to be much less severe this time around.
• This year has demonstrated that of all of big tech, Google is the one that takes the biggest hit when the economy stalls.
• Hence, the risk-reward on Google does not look desperately attractive and one could make the argument that Amazon represents better value.

Take-Home Message

• Big tech continues to fare extremely well as a result of the pandemic, but it is government-financed furloughs and stimuli that have driven the outperformance.
• These cannot continue forever and will soon end or be cut despite the fact that the pandemic looks set to grind on for the whole winter.
• Consequently, it looks like big tech has seen the best of its performance as the drivers for the sudden jump are beginning to wane.
• Consequently, it is probably time to look elsewhere in the economy or in the value-end of the technology sector for outperformance from here.
• I am still very cautious as the market overall still looks very overbought thanks to the big technology names and it is ripe for a sharp correction.
• I still have a heavy weighting towards cash in my portfolio