Big Tech Stock Earnings Boom! Is It Too Late to Get In?

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Market News and Short-Term Predictions

The Superbowl week of earnings returned this week and so we are going to dive into a couple of names I own (GOOGL/META/MSFT) and then RTX which was on the watchlist after their Q2 earnings fall.

Google (GOOGL): Alphabet, Google's parent company, reported a 7% increase in Q2 2023 revenue to $74.6 billion (+7.0% Y/Y) beating by $1.84B. Q2 GAAP EPS of $1.44 beats by $0.10.

The company experienced growth in search, YouTube ad revenue, and its cloud business.

CFO Ruth Porat will be taking on a new role as President and Chief Investment Officer of Alphabet and Google. The "Other Bets" division saw a revenue increase but continues to lose money (but at a lower pace). I did a short video highlighting the crucial takeaways as well.

While I think Google is one of the big tech stocks that has the most upside to an intrinsic value ( a little undervalued), I plan on holding onto my core position (not quite in the buy more range).

Meta (META): Meta, the parent company of Facebook and Instagram, reported a strong increase in revenue and net profit for Q2 2023, surpassing expectations. Q2 GAAP EPS of $2.98 beats by $0.07. Revenue of $32B (+11.0% Y/Y) beats by $970M.

The company expects its ad business to continue recovering and its daily active user count to grow. Facebook daily active users (DAUs) – DAUs were 2.06 billion on average for June 2023, an increase of 5% year-over-year.

What is interesting is they were able to serve more ads (+34%) while lowering the cost of those ads to advertisers (-16%).

Reels, Meta's video feature, is generating significant revenue with the annual revenue run rate across our apps now exceeding $10B, up from $3B last fall.

Cost-cutting measures have led to a decrease in headcount. Headcount was 71,469 as of June 30, 2023, a decrease of 14% year-over-year. They did deal with restructuring costs in the billions, but a leaner structure may serve shareholders well over the long term.

Threads, a text conversation app, received over 100 million sign-ups but has seen declining user engagement. Meta plans to focus on building and scaling Threads before monetizing it.

Overall, their free cash flow is back to above $10 billion/quarter and growth is back on the table.

The valuation is more in the fair range, and I am not adding more to my core position.

Microsoft (MSFT): Microsoft's Q2 2023 earnings report, released on July 25th, 2023, showed revenue of $56.2 billion, an 8% increase (10% in constant currency). Earnings per share were $2.69, a 21% increase (23% in constant currency).

The Microsoft Cloud generated over $27 billion in quarterly revenue, with strong growth in Azure and AI offerings. Microsoft Teams now boasts 280 million monthly active users, and Dynamics 365 gained market share. The security business surpassed $20 billion in revenue. LinkedIn reported record engagement.

However, the company's shares dropped 4% in after-hours trading due to the company's quarterly revenue guidance falling short of analyst expectations. The Windows operating system segment also underperformed with revenue of $12.5 billion to $12.9 billion.

Microsoft is committed to leading in the AI era and expanding its use across its tech stack. The company emphasized its focus on maximizing the value of the Microsoft Cloud, investing in AI, and driving operating leverage. The company also discussed the release of its copilot tools and expects its gross margin percentage to remain flat and its tax rate to be around 19% for fiscal year 2024.

I like Microsoft as a stock, but I am also not buying at these levels. I think a lot of the AI developments are baked in and we have to remember the stock is a $2.5 trillion market cap. It's harder to move the needle especially when they are already trading at higher historical multiples getting close to 40.

Holding onto the core position, but think it's a bit overvalued.

Raytheon (RTX): RTX Corporation (formerly Raytheon) has announced its second quarter 2023 earnings, with a 12% increase in sales compared to the previous year. Net income rose by 2%, and adjusted EPS grew by 11%. The company predicts sales of $73-74 billion and adjusted EPS of $4.95-5.05 for the entire year of 2023.

The stock fell hard though after earnings because of guidance over FY free cashflow due to high-pressure turbine issues in Pratt & Whitney aircraft engines overshadowing the positive news.

This is a behemoth in the defense industry, and so as long as the turbine issue is more short-term fear, the selloff in my opinion is a great entry into a safer more stable dividend stock. I also don't have exposure to the sector in the portfolio right now. With a lot of stocks trading in a fair value range, I am starting to add to this one on the "fear".

In regards to the economy, The Federal Reserve raised interest rates by 25 basis points, reaching 5.5%, the highest level since early 2001. This decision was influenced by economic expansion, a strong job market, and the resilience of the banking system.

The Fed's move was driven by concerns over high core inflation rates. However, the Fed did not provide a specific plan for future rate hikes and will rely on upcoming economic data. I personally think they may be done increasing rates. Now it is a wait-and-see-what break in the economy game that could take until 2024-2025.

Lessons to Be Learned

Another stock that was on my watchlist was ENPH (Enphase Energy) which reported earnings today. While this quarter's earnings looked good, what caused the stock to crater 13% after hours is the guidance for next quarter.

Revenue guidance for Q3 was $555M-$600M, far below the $749M analyst consensus estimate. This means that their Q3 revenue growth would be negative as in 2022 they brought in $635M.

I talked about it last week, but that guidance from growth to negative growth gave me hesitance to jump in front of this down move quite yet. I had the name on the watchlist because they have had a tremendous growth story in a sector I would like to eventually get exposure to (solar). I have a feeling solar installers in the home/business sector may deal with headwinds as the surge in oil pricing over the last couple of years allowed them to sell their energy solutions easier. Pair that with higher interest rates, businesses, and consumers are less likely to finance their purchases.

I am not ditching the name quite yet though, I'll keep them on my watchlist but what I want to see in a cyclical name like this (where they tend to go through boom and bust) is a turnaround in revenue growth.

I expect next quarter to show negative YoY growth. What I want to see is at least a few quarters of revenue recognition before I sign up for a higher P/E ratio. With the name still trading at a higher P/E, the fact growth has stalled could spell more downside in the name.

The overall lesson is don't ignore trend reversals or macro headwinds for growth names as they are more volatile compared to an established blue chip stock.

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, ENPH, LLY, CHDN, RTX

Options: SPLG, PLTR, BAC, MPW, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices.

Options Trading Portfolio

Closing Trades

I was able to close a SPLG position I had been wheeling for over a year. After all was said and done I profited $190 in the position when I netted out the loss from the stock, dividends paid, and premiums collected. That goes to show, if you wheel a stock like an index etf when the general market eventually rebounds you can make money on that position you wheeled if you managed it correctly during the downturn. I also closed out winners in BAC/MPW for $37 in profits as well this week.

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