Jonathan Kitchen
Mega tech companies such as Apple (AAPL), Meta (META) and Amazon (AMZN), have seen their share prices tumble this year. Kim Parlee speaks with Vitali Mossounov, Global Technology Analyst and Portfolio Manager at TD Asset Management, about the latest earnings and the outlook for tech stocks going forward.
Kim Parlee: Mega-cap tech names like Apple, Google (GOOG)(GOOGL), Meta, Amazon– they’ve all suffered double digit declines this year, and their stock prices are sitting near the lows so far. So are there more headwinds coming or could we see, maybe, a bounce back next year? Here to tell us what he is thinking is Vitali Mossounov. He is portfolio manager for the TD Global Technology Leaders Index, ETF Tec– T-E-C– at TD Asset Management. It is nice to have you here.
Vitali Mossounov: Hey, Kim.
Kim Parlee: Let’s start off with the earnings. It feels as though, that the earnings that we’ve heard, there’s kind of an implosion going on on the earnings front.
Vitali Mossounov: There is an implosion going on and– take a bit of a step back– we usually talk about tech because of the big five tech companies. We know all the names and every quarter they report and it’s a big week, it’s about five, more or less, consecutive days and everyone’s closely watching. The stocks move, they move the markets, they’re big companies. Historically, some report good results, some report bad results, and after all the excitement it’s all kind of a wash. Right? Some share prices went up, Apple sold more phones, and maybe Alphabet sold less advertising so share price went down. This was a bit of a unique earnings season.
Kim Parlee: Unique, not good. I don’t like the way you’re using unique.
Vitali Mossounov: Unique, not good. Well, it’s like volatility when markets go down, and so we use the word unique here as a synonym. So you had four, first to report, that, I think the word implosion is fair, and then Apple kind of saved the day. That stock was up. But even if you go and average the five share price reactions from those big tech companies, even with Apple, they were, on average, down 8% the next day. Catastrophe.
Kim Parlee: Yeah, that’s a tough one. So maybe– I know you’ve brought some pictures for us, some charts. So let’s–
Vitali Mossounov: Visual learner.
Kim Parlee: Yes, and let’s bring those up and tell me, just to expand a bit upon this reaction that we saw.
Vitali Mossounov: Yeah, the first chart is a pretty simple one. It’s two lines, and the one line is comfortably above the other. So what are we looking at? The top line is revenue growth for these five big tech companies averaged out. Revenue growth has been decelerating, that’s over the last four quarters, and it’s been decelerating to about 7%. That was the average growth in sales for Q3. Not too bad, inflation seven, they had some foreign exchange headwinds. That I would call fine. It’s the line under it that’s the problem and that’s earnings. Earnings growth was a whopping negative 20%. And what that means is, every single quarter, but especially in this one, these companies are spending like drunken sailors. They’re spending more than what they bring in. And so here a bunch of blue chip companies– imagine that Kim– who announced to the markets that earnings are down 20%. That’s not blue chip, right?
Kim Parlee: Mm-hm. It really isn’t. So why? I mean, if we get a bit more into the earnings being disappointing– and we’re hearing now more from companies in terms of how they plan to remedy that, and we’ll get to that in a moment. Well, actually let’s get into it now. I mean, Meta is a good example. They’re laying off. So that’s one way to cut expenses is to lay off more than 11,000 people.
Vitali Mossounov: Yes, very unfortunate for those people, but these are people-heavy businesses. A lot of intangible assets, a lot of brains in these companies and there has been quite a significant growth in headcount that’s driven some of that expense growth and that negative earnings growth. And so we have another chart here we can pull up and that really puts everything into context. That’s going to show the audience the amount of staff that these companies have– those are simply the bars up on your screen– there’s a few hundred thousand now– but even more importantly, the line represents the year-over-year growth in employees at these businesses. And you can actually see that they were pretty well run in terms of headcount, growing 15% year after year after year. Now, you get to 2021, that growth dips, and that’s because COVID led to some freezing and slowing down of hiring decisions. But then 2022, headcount growth accelerates. Times were good. Growth and headcount went up 20%. So this is where we sit today. The big question is, can they bring this under control?
Kim Parlee: It’s an interesting– when I look at this chart, if we can just keep it up for a moment– I almost see there’s a battle between what I’ll call the structural and the cyclical. Right? Where the structural– maybe we had some big changes in how life worked during COVID.
Vitali Mossounov: Yes.
Kim Parlee: And then now we’re dealing with the cyclical, which is the just recession cycles expanding, contraction, all that stuff that happens with what central banks are doing. So it’s just interesting to see that because there have been structural changes. We do use technology more, in everything we do, but at the same time, now, we’re faced with a slowdown.
Vitali Mossounov: You’re exactly right, and I think the thing to keep in mind is the question that’s now posed, and is it can these companies get their costs under control? Right? And I think there’s two questions to ask and answer, is can they get their costs under control? The answer is yes, in my opinion. Can they do it quickly? That’s the second question. And the answer there is no. And if you look back– I think the chart’s off the screen now– but if you think back to the chart, you saw in 2021, employee headcount was 10%. It was quite low. That’s because of the lag, these big ships, these behemoths, of hundreds of thousands of employees.
Kim Parlee: Revenue grows faster than they expend people.
Vitali Mossounov: Then you decide to hire and by the time you bring on the people the cycle has already changed.
Kim Parlee: Yes.
Vitali Mossounov: And so what investors need to be careful about is right now spending’s out of control. And so you can say, well, I’m going to forget about these businesses. Revenue growth is slowing and they’re growing their expenses way faster. I think the important signal to take– and you brought up Meta, Facebook, moments ago– every single one of them, I think, is taking relatively big actions to rein in expenses. So we should be thinking, where is the puck going? Because if we’re sitting here in a year and that headcount growth is down to 5% and revenues are still growing 10, that’s a very good setup for stocks.
Kim Parlee: It is. I guess the question is whether the revenue is still 10. I mean, and that’s the thing you get–
Vitali Mossounov: And then you tell me what size the recession is and I’ll tell you the answer to that.
Kim Parlee: [LAUGHTER] I don’t know. I was going to ask you that. Let’s run through some of the big names. Let’s run through Microsoft (MSFT).
Vitali Mossounov: Sure.
Kim Parlee: They came out with their earnings– and remind me again, because at top of mind– I think it was — they weren’t terrible, like some of the other ones, but it was a slowdown.
Vitali Mossounov: It’s a Steady Eddie blue chip company, and so there was an expectations miss in the growth of their cloud but, really, the numbers were good. Again, the theme this earnings season is that the spending is too high. And Microsoft wasn’t nearly as bad as the other folks and they actually have a pretty good, I think, projection of how they do get that under control. But a little bit slower growth, a little bit higher expenses, and the market didn’t like that very much in this environment so I think those shares were down as much as 7%. Microsoft was not its usual self, but far from a disaster.
Kim Parlee: Yeah, it’s an unforgiving market and an unforgiving chart, too, down 33% on the year. Apple.
Vitali Mossounov: Yeah.
Kim Parlee: Apple’s been coming out, they’ve been warning that not be able to meet demand right now, in terms– or, sorry– they won’t be able to meet the demand because of their supply restrictions.
Vitali Mossounov: Mm-hmm.
Kim Parlee: Maybe the demand will come down to, we’ll see. But what do you see there?
Vitali Mossounov: We’ll see. Apple’s been a real defensive stock–
Kim Parlee: Yeah.
Vitali Mossounov: –this year. Frankly, it has surprised me because these are rather expensive, let’s say, discretionary purchases. But Apple has surprised many in that respect, has held up very well, the business has. And this was a– I’d characterize it as the best quarter out of the big tech companies. The sales were there, again. iPhone sales were strong, Macs were strong, really everything. And they don’t have the same cost issues, I would say, to the same degree. So Apple’s coming through, but the big question, again, with Apple is what’s going on with production? For now, they literally days ago had a press release. They said, we can’t produce the phones. There’s a lockdown where we make the high value iPhone Pro. But demand is still strong, they reiterated that. But the question is, will that demand be there three, six months? Again, depending on how the economy is doing.
Kim Parlee: Yeah, yeah, yeah. It’s funny if people classify Apple as discretionary. I mean, ever watch somebody lose their phone–
Vitali Mossounov: Yeah.
Kim Parlee: –how much they panic? It’s not discretionary.
Vitali Mossounov: So– I couldn’t put it far from you–
Kim Parlee: I know.
Vitali Mossounov: –before the interview.
Kim Parlee: Exactly, right.
Vitali Mossounov: Google. Yeah, and Google, or Alphabet, they were OK on the top line. Now very discretionary spending there for sure, because we’re talking really about an advertising business. Up 11%, 6% after the foreign exchange headwinds. But all in all, not bad. That’s not where the disappointment was. The disappointment was– imagine that one quarter after management tells you that they got the message, they’re getting costs under control, they have a record amount of hiring that they do. Big ship, hard to turn. I think they’re doing it. But immediately there was a lot of disappointment, and, well, you saw the chart.
Kim Parlee: Yeah, 41% on the year. Meta– actually we talked about Meta, I want to get to Amazon. We’ve only got about 40 seconds, so tell me what you see with that.
Vitali Mossounov: Yeah, Amazon had actually really good retail sales, they’re up, I think, 15% or so. People are buying stuff on Amazon, you and I probably belong to that large group or cohort. AWS, like the Microsoft Cloud, that slowed down. That was the first disappointment. But really, again, the big knock against Amazon– and why that chart actually looks better than it should because it was down 25% after market that day after reporting– and it’s all about spending. Amazon not cutting spending fast enough, and there are no profits in this business. And investors keep giving them a second chance– maybe next quarter, maybe next quarter– and Amazon always comes up empty.
Kim Parlee: Vitali, good to have you here. Even if I don’t love everything you’re saying, but it’s still good to have you here. Thanks so much.
Vitali Mossounov: Thank you.
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