After yesterday’s market close, tech giants Microsoft (MSFT) and Alphabet (GOOG, GOOGL), the parent company of Google, reported calendar Q3 earnings. In doing so, they demonstrated why people keep buying big tech names, and why investors should continue to do so.
Both beat estimates for EPS and did so with something in hand. MSFT earned $2.27 per share versus expectations for around $2.06, and GOOG reported earnings per share of $27.99, beating the consensus estimate for $23.13. That, though, was only part of the story.
In both cases, the most impressive thing about third quarter results wasn’t necessarily the profits; it was that the companies managed to overcome the law of large numbers when it comes to stocks. They posted big percentage growth on already massive revenue numbers, particularly in important areas of their business. Microsoft, for example, reported 48% growth in Azure, their cloud computing business, while Google grew their equivalent business by “only” 45%.
Add that to results like those of Tesla (TSLA), which nearly doubled the expected EPS last quarter, and you have a tech sector that, for investors, is the gift that keeps on giving. That is important because most of us own those stocks, even if we may not be fully aware that we do. The top eight components of the S&P 500 by weighting are all tech companies, with both GOOG and GOOGL listed separately and with AAPL, AMZN, FB and NVDA joining those already mentioned here. Between them, those eight stocks make up over 25% of the index, so anyone who has index tracking funds in their portfolio or 401K has a lot of exposure to them.
If that scares you a bit, relax! That exposure has been a good thing for a while and will continue to be a good thing for some time to come.
Periodically, the trend in financial media is to give time and space to those who earnestly tell us that the outperformance of tech can’t last. They seem to believe that “real” companies are only those that make physical things, and their inability to appreciate the value of a virtual economy in any way stops them from seeing what is going on in front of their faces. Thus, they tell us that there is an inevitable rotation coming away from tech and into manufacturing, or materials, or whatever. To some extent, they are often right for short periods but, in the long-term, tech continues to outperform.
Following their earnings, MSFT popped, as you might expect but, so far, Alphabet shares are a little lower in out of market trading. That is because while the report was great in almost every way, it wasn’t quite great enough. Expectations were extremely high for Alphabet and beating the whisper numbers on every metric was probably too tall a task for any company. Some traders with exaggerated long positions were looking for a shortfall anywhere, so a slight disappointment in a couple of areas has prompted some selling.
As with Tesla last week, though, the drop on that nitpicking comes from the exit of fast money and won’t last. Over the next few days, indeed probably during today’s session, the focus will most likely shift to the long-term trajectory of Alphabet and its continued strong growth. It is treasonable to assume on that basis that the stocks will bounce back and power on up to yet more new highs.
Big tech stocks have been consistent outperformers in the stock market for years and even as the numbers get bigger and the projections get wilder, they continue to deliver. Microsoft and Alphabet’s earnings last night showed that all too well. So, next time you hear a gaggle of talking heads telling you that there is a rotation into manufacturing stocks or whatever and that big tech has had its day, know that any weakness in stocks like MSFT, GOOG, GOOGL, AAPL, AMZN and TSLA is just a buying opportunity and act accordingly.
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