You don’t need me to tell you that there’s a ton going on. Between Earnings Season, the political games in Washington and the inflationary pressures tied to supply chain strains, I decided to do another rapid rundown. I also dug into the Meta news, though I might just refer to it for now as the company formerly known as Facebook. The Market is taking everything very much in stride, hitting fresh all-time highs in the face of so many challenges. Climbing a Wall of Worry? That’s the Market way. So here it goes:
Earnings Season hit the halfway point this week. Over 80% of the S&P companies that have reported beat estimates, despite the challenging environment. Demand remains strong: Demand is not the issue. Supply is. Low supply with high demand results in rising costs. It’s inflation that is holding things back. Corporate America provided insight into what they see and how they’re dealing with it. McDonald’s is raising prices to keep up with growing costs. The company said Labor is up 10%, and they’re having trouble filling jobs. That’s a huge theme around the country. Heinz is having trouble making ketchup to meet demand. Back-to-school lunches put a premium on condiment packets, and the supply chain strain slowed delivery. You might have noticed the price increases on the shelves. Coca-Cola has amongst the widest distribution system of any company in the world. It too faces supply chain challenges. The fact is, Coke always faces some challenges within its global supply chain. There’s always some geographic issue to deal with. But CEO James Quincey, hinted this week that the worst might be over. “My analogy would be it’s a bit like an earthquake. You get further shock waves coming through, but they tend to be of diminishing magnitude.”
When it comes to Earnings Season, there’s always a spotlight on week 3. With nearly 40% of the S&P reporting, it’s the busiest week by far. It’s also when the Tech Titans report. These Top 4 holdings account for roughly 20% of the S&P 500 alone.
Apple reported another strong Qtr. Revenues jumped 29% to a whopping $83.4 Billion. The problem is, the Street expected $85 Billion. Apple missed on revenue for the first time since 2017. The company merely matched Wall Street estimates for earnings for the first time in 5 years. Apple said a $6 Billion headwind from supply constraints and expectations for an even bigger drag in the Dec Q. iPhone revenue was up 47% in the Qtr, showing demand is still strong for its flagship product. It was supplies that fell short of reaching its total demand. Apple’s CFO reiterated on the conference call that demand remains “very, very strong and the company wishes it had more supply.” Apple expects to set a December quarter record in spite of the supply constraints. Apple now has 745 Million paying subscribers for its various services, compared to 660 Million just 6 months ago. Apple’s Services business is now the company’s second fastest-growing category after the iPhone. The stock took this news very much in stride, and closed Friday down less than 2%, back to where it was just a week ago.
Amazon reported a rare double miss. Supply chain and higher labor costs were the culprit. Amazon was raking revenue in early in the pandemic, as people quarantined at home and shopped online. As America re-opened, Amazon noticed a slight decline in activity, but the trend toward ecommerce is irreversible and Amazon dominates the space. As a reminder, the company has a new CEO. His name is Andy Jassy. Though he is new to the role, Jassy is an Amazon veteran who worked very closely with Jeff Bezos and was the hand-picked successor. Jassy has his hands full though, dealing with labor shortages, higher employee costs, global supply chain constraints and increased freight and shipping costs. How about this: Amazon hired over 600K workers during the pandemic. And the company is still understaffed. “It’ll be expensive for us in the short-term, but it’s the right prioritization for our customers and partners,” Jassy said. Beyond retail, revenue from Amazon services, which includes AWS, advertising, and Prime subscriptions, is now the largest revenue segment for the company. Amazon does far more than sell stuff online. Amazon is a Titan of Tech.
Microsoft and Google both flexed their muscles with solid Q3s.
Microsoft was a big standout this week. Revenues grew 22%, the fastest in 3 years. Earnings grew a whopping 48%. The company raised its outlook too, which the Market always likes. The Street is giddy with its digital transformations and Azure’s acceleration. Azure is Microsoft’s answer to Amazon Web Services and Google Cloud. Microsoft’s shift toward more cloud-based software and services continues to pay off. The results are really strong quarterly numbers. Azure grew 36%, with sales over $20 Billion for the first time. CEO Satya Nadella has Microsoft delivering. This is a far cry from Bill Gates’ Microsoft from 2 decades ago.
Google parent company Alphabet shattered expectations on Tuesday. In fact, Alphabet reported the biggest quarterly revenue gain in 14 years. Revenues jumped a whopping 40% to over $65 Billion on the back of strong advertising revenues. I’m going to say it again, 40%!! That’s just incredible growth for a company of this size. Google has been the beneficiary of a rebound in search traffic, especially with keywords related to travel and retail trends. They’re seeing these improving trends globally. Even though its cloud computing business missed elevated estimates, it still grew by 45%. It’s beyond impressive how these 2 companies have executed. And their stocks reflect that success.
These 4 dynamic companies are the Tech Titans. But there’s a new leader. Microsoft overtook Apple as the most valuable company in America on Friday.
The US economy grew at its slowest pace in more than a year. Gross Domestic Product expanded at an inflation-adjusted 2% annual rate in the September Qtr. That was a significant slowdown from the 6.7% pace in Q2. It also missed the 2.7% estimate. The pace of core inflation, the Fed’s preferred gauge, decelerated a bit. Inflation slowed to 4.5% in Q3 from the 6.1% increase reported in Q2.
Growth was hit by two main factors: The first was Delta, which caused a resurgence in Covid cases. That led to additional labor shortages, factory shutdowns, supply chain bottlenecks and general shrinking of economic activity. Americans pulled back from travel and restaurants and other outings. The second was the government stimulus. The extra unemployment benefits led to a spike in savings which helped GDP grow at a robust rate in the first half of 2021. It went away in September. There are signs that activity is picking up and the Holiday spending could be robust. Q4 is looking pretty promising as America opens up its wallet.
President Biden headed overseas on Friday. He first met with the Pope followed by the G20 in Rome, wrapping with a Climate Summit in Scotland. The President didn’t have a victory to celebrate though. His fellow Democrats derailed a vote again on the $1.2 Trillion bipartisan infrastructure package. The Democratic party has been struggling to unite, much to Republicans’ delight, amidst a push for more guarantees on their Build Back Better plan. The 2022 midterms are going to be contentious. The Virginia Governor race is seen as a barometer of things to come. The election is next week. It’s a tight race.
According to our Washington sources, both of these Congressional bills are still expected to eventually pass. But urgency is felt in some camps and not in others. Perhaps more important; It’s not a good message to the rest of the world that the United States continues to struggle with governing itself. This is not new. It’s been an issue for decades. Both political parties are responsible. It’s been a slow, debilitating cycle and our adversaries just love it.
Facebook is now Meta. CEO Mark Zuckerberg formally made the announcement yesterday. Apparently, he is obsessed with the metaverse. In Greek language, the word meta means beyond. The metaverse is essentially a virtual-reality platform in which people congregate and communicate in digital environments. This from Zuckerberg: “Our mission remains the same. We’re still a company that designs technology around people, but now we have a new North Star. From now on, it’s going to be metaverse first.” Mark Zuckerberg has stated he believes the metaverse is the next stage of the internet where people can “interact in immersive, 3D and shared digital worlds.”
Facebook is following Google, who did this in 2014. Google changed its corporate name to Alphabet. The goal was to expand the other businesses like Android, YouTube and Chrome under the Alphabet umbrella. The thinking was Google aimed to be much more than Google. To that end, the company formerly known as Facebook wants to be known for more than social media. It will maintain the Facebook brand on the platform while growing its other businesses like Instagram, WhatsApp, and Oculus under the Meta umbrella.
Facebook also has a major public relations crisis upon them, so a re-branding is an old trick. Philip Morris, Accenture and Enron are amongst many who went that route. As I was looking into this name-changing event, I came across something I found fascinating, and did not know. Maybe you did?
Facebook’s campus used to be owned by Sun Microsystems. The company was a Silicon Valley darling of the 1990s. Sun Microsystems was a casualty of the Dot-com bubble burst, and was ultimately picked up by Oracle at a fraction of its previous value. Apparently, Facebook Management decided to keep the old Sun sign when they moved in, but it flipped it around, displaying their thumbs up (Like) sign in front. I found a quote from 2014 from a Facebook insider that stated: “The old sign remains as a reminder of what happens when you take your eye off the ball.” It sounds like that old Sun sign is still there. But has Facebook management been keeping their eyes on the ball? That’s a rhetorical question of course. Most people have a quick answer.
I must say, in looking at the new Meta logo, it looks to me like a blue pretzel, or even a Batman mask. Thanks for staying with me on this long and broad piece. I hope it kept your attention.
Have a nice weekend. We’ll be back, dark and early on Monday.
It’s A Jungle Out There
The Bedell Frazier Traveling Hat was spotted monkeying around – or more accurately- gorilla-ing around with its adventurous travel companions as they took on a mountain gorilla trek at the Bwindi Impenetrable National Park in Uganda and then visited with other wild friends in Tanzania. Where will it go next? You tell us!