Investors will only warm to the technology giants who get with their thrifty programme
Published 03/08/2015 | 02:30
Investors have started to reward internet companies that can show both financial discipline and a path to long-term growth, making Amazon and Google the clear winners of the technology earnings season.
Google kept costs in check in the second quarter, and shareholders cheered with a 16pc gain after it released better-than-expected results. Amazon also surged after posting a surprise profit, demonstrating it is capable of making money when it puts a brake on spending.
"Internet investors are focused more on growth in users and revenue," said Paul Sweeney, an analyst at Bloomberg.
"Amazon is the best example of this investor mindset. However, whenever a company throttles back its expenses and drives profits, as Amazon and Google did this quarter, investors are pleased and drive the stock higher."
Facebook, which vowed to keep its brisk pace of investments to lure users and advertisers, fell as chief executive officer Mark Zuckerberg was short on details about money-making plans for newer initiatives, like WhatsApp and Oculus.
LinkedIn and Twitter both slumped over concerns that user growth is slowing. Microsoft posted its largest-ever quarterly loss. And Apple failed to meet predictions for iPhone sales and growth for the quarter. "The second quarter was very much a mixed bag," Sweeney said.
Technology companies in the Standard & Poor's 500 Index beat analysts' earnings estimates at a 71pc pace so far in the season, data showed. The rate is lower than for the entire S&P 500 Index - at 74pc - with notable misses including Yahoo! and Oracle. "The big players in digital advertising are winning, which are Google and Facebook," said John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, who helps oversee more than $2bn. "They're doing very well. A lot of the smaller digital companies are not doing well."
Google's shares surged after chief financial officer Ruth Porat signalled plans to bring more restraint to spending.
"The priority is revenue growth," Porat said on a conference call after the report, her first at Google.
"We have a breadth of opportunity, but pursuing revenue growth is obviously not inconsistent with expense management." For Amazon, a day of sales on July 15 to mark the company's 20th anniversary, called Prime Day, exceeded expectations. The promotion, designed to drive Prime membership sign-ups, generated orders surpassing Black Friday, the US sales event that kicks off the year-end holiday shopping season. Revenue for the company's cloud-services business rose 81pc year on year, and 49pc from the previous quarter.
Facebook reported second-quarter revenue that beat analysts' estimates, but investors were disappointed by the growth of the company's applications that could be making billions on their own. The focus for the three apps - WhatsApp, Instagram and Messenger - was still on expanding their communities, Zuckerberg said. Instagram started to sell ads, but it's not going to have an impact on Facebook's bottom line for a long time, chief operating officer Sheryl Sandberg (pictured) said.
Microsoft posted its largest-ever quarterly loss and offered a disappointing sales forecast. Net loss amounted to $3.2bn due to a $7.5bn write-down of the Nokia handset unit.
While revenue from Microsoft's cloud-computing business rose, sales of Windows to PC makers and corporate customers sagged. The write-down was an acknowledgment that the Nokia deal had lost almost all its value after failing to rescue the company's smartphone business.
While Twitter's second-quarter sales topped estimates, it posted disappointing numbers on user growth. Ceo Jack Dorsey and cfo Anthony Noto took a critical tone on the pace of expansion on their earnings call with analysts, saying they have work to do and don't expect significant progress anytime soon.
LinkedIn increased its annual revenue forecast, topping estimates, but said most of the gain will come from the acquisition of the education website Lynda.com. Shares of the professional-networking website slumped on concerns that the company's core growth areas were slowing.
"The bar has been high for technology companies this season," said Dan Veru, chief investment officer at New Jersey-based Palisade Capital Management LLC.
"LinkedIn is a perfect case in point. The bar was high, but investors didn't like the way they beat it because they beat it with an acquisition closing."
Investors are concerned about LinkedIn's core business and "what it really is," Veru said. "That's why the stock is down," he said. (Bloomberg)