Tech giants to report earnings Thursday amid rising scrutiny
Fans of technology stocks will be paying close attention Thursday as four of the biggest names in the sector — Alphabet Inc., Amazon. com Inc., Microsoft Corp. and Twitter Inc. — are among those scheduled to announce results.
The tech giants, though, continue to deal with increased scrutiny from lawmakers and regulators over their tightening holds on market share and everyday lives. If the scrutiny leads to action, it could put the shining share prices of some of those companies — and heady returns for investors — at risk.
Here’s a look at the situations that the big four tech stocks reporting Thursday are facing.
ALPHABET
Google parent company Alphabet found itself in the European Union’s crosshairs this year, slapped by regulators with a $3.4-billion fine over accusations the search engine operator was tilting results in favour of its shopping service.
Barclays Capital said in a note earlier this month that “increased regulatory scrutiny” was one of the issues weighing on the stock, which is still up nearly 25 per cent on the year, closing Tuesday at US$988.49.
But Alphabet isn’t straying away from the shopping space, and recently struck up a partnership with Walmart to deliver voice shopping and personalized results for customers.
“The company does not view its recent partnership with Walmart as an ‘anti-Amazon’ alliance, but sees a large opportunity to work together to drive value for consumers,” BMO Capital Markets said in September. “From Google’s perspective, we believe this could potentially help drive increased adoption of Google Home devices.”
MICROSOFT
Microsoft is also no stranger to EU-style justice, having been fined by the bloc’s regulators in 2004 over complaints of anticompetitive conduct.
Now, however, Microsoft appears to be the one successfully putting pressure on governments to change, as it launched a lawsuit last year in connection with allegedly routine U.S. government orders that kept demands for user emails and other records a secret.
Microsoft said Monday it would move to drop that lawsuit after the Department of Justice put forward a new policy. Microsoft president and chief legal officer Brad Smith said in a blog post that the new guideline “limits the overused practice of requiring providers to stay silent when the government accesses personal data stored in the cloud.”
Shares of Microsoft have gained nearly 27 per cent on the year, closing Tuesday at US$78.86.
AMAZON
The Seattle-based e-commerce company is certainly trying to live up to its reputation as the “everything ” store.
Amazon is reportedly getting into the activewear game to challenge the likes of Canadian-based Lululemon Athletica Inc.
“As for timing, we suspect AMZN will start slow to gauge and test consumer appetite before scaling the business rapidly,” Canaccord Genuity said in a note. “AMZN is highly focused and determined to become the #1 online shopping destination (for) fashion customers and this push into athletic apparel is evidence of that directive.”
But, along with other tech companies, Amazon has been spending millions of dollars on lobbying the U.S. Congress.
Amazon’s purchase of Whole Foods was a move that put the online retailer in direct competition with traditional grocers and won U.S. antitrust approval.
“Retail profitability is likely to continue to suffer near term from heavy investments in both core AMZN and Whole Foods, but most investors understand that margin is available when AMZN decides to capture more,” Barclays said in a note.
Shares of Amazon are up more than 30 per cent for the year, closing Tuesday at US$975.90.
Twitter has a special place in the pantheon of tech stocks, as it is seemingly President Donald Trump’s go-to spot for slinging insults and pronouncements. Twitter executives, along with their counterparts from Facebook Inc. and Google, have also reportedly been asked to testify before the U.S. Congress, which is probing alleged Russian meddling in the 2016 U.S. election.
Twitter, however, faces its own internal challenges as well, with the company reporting no movement in its monthly active users for from the first to second quarter of 2017. Twitter’s stock price is up around 5.8 per cent for the year, but down more than 58 per cent since it started trading nearly four years ago, closing Tuesday at US$17.25.
Barclays said earlier this month that it expects Twitter to report an additional three million or so monthly active users this quarter, as the company “continues to make progress on the product side.” One of my favourite courses in university was the Anthropology of Technology: how new technological introductions have profoundly impacted human culture and helped shape the core of societal development.
At the time, I would have never have guessed that it would have such an important role to play in my investment career, especially when it comes to understanding markets and economies that are now being influenced by a pace of innovation never seen before in history.
The increased pace and, along with it, the rapid evolution of the technological ecosystem makes this decade very different from others in the past. This ecosystem accelerates the implementation of even newer technology, which, in turn, quickly builds upon itself.
Ray Kurzweil summarizes this in his book The Singularity is Near by saying: “The first computers were designed on paper and assembled by hand. Today, they are designed on computer workstations with the computers themselves working out many details of the next generation’s design, and are then produced in fully automated factories with only limited human intervention.”
The introduction of the smartphone was a key development, creating one giant ecosystem connecting all of us and our personal data. The race is on to analyze this data in the best way through cognitive computing and artificial intelligence while integrating it with the deployment of robotics and automation.
The changes have also caused a shift in traditional business models, with the primary focus now on how to get immediate access to all these connected devices. Products and services are given away at or below cost in hopes of establishing an extensive network of client data to use in order to introduce an additional premium product or service for a fee.
Consequently, a successful model rapidly grows user counts before progressing to annual recurring revenue and, eventually, profitability.
This has created a huge improvement in the deployment of new products while driving costs down and lowering prices for consumers. Amazon.com Inc.’s acquisition of Whole Foods Market Inc. and its immediate announcement of a 40-per-cent cut in many of its food prices is a great example of this.
As a result, we get economic growth without the traditional inflationary cycle, which can seem very confusing to the baby boomer generation that currently sets economic fiscal and monetary policy.
Each generation has seen an increasing pace of technological development, but those running central banks today are sticking to policies that are no longer relevant, causing all kinds of distortion in risk parameters.
For example, there’s US$8trillion worth of global bonds with negative yields, and European junk bond yields are trading near U.S. Treasury yields of similar duration. At the same time, equity markets such as the S&P 500 have been bid up to the highest level ever from a median price-to-revenue basis while U.S. credit volatility is at its lowest point in 20 years.
The belief in cryptocurrencies as the future has sent Bitcoin rocketing with a market capitalization now larger than 88 per cent of the companies on the S&P 500, according to Charlie Bilello of Pension Partners.
Not surprisingly, the techheavy Nasdaq 100 has followed course, setting 61 all-time highs this year.
It’s only one more day away from the annual record of 62 set in 1999, according to LPL Financial Research.
From this gen-Xer’s perspective, it is a strange environment indeed, with economic growth being masked by moderating consumer prices and low levels of inflation.
Throw in record low interest rates, investors disregard for risk and the stampede into anything technology related and you have a distortion approaching very concerning proportions.