Big tech smashes expectations with bumper profits

Big tech companies posted quarterly results far in excess of expectations, with Apple, Alphabet and Microsoft generating a combined $56.8bn post-tax profits – almost double the previous year’s figure and 30% higher than expected.

Alphabet recorded second-quarter profit of $18.53bn, a huge increase over last year’s $6.96bn. Microsoft’s net income grew to $16.4bn compared to $11.2 billion in the same quarter last year. And Apple hit a profit of $21.74bn in the quarter, compared to $11.25bn last year.

The bumper results will be followed by quarterly results from Facebook later on Wednesday, while Amazon reports on Thursday.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Why have big tech companies performed so strongly?

When Covid hit in March last year, many people and companies shifted their day-to-day activities online. Widespread lockdowns in place for months meant many of the big tech firms saw their fortunes grow. Growth in cloud businesses was key as the world transitioned to working from home.

The spectacular results reflect how big tech companies – perhaps the biggest beneficiaries of the pandemic – continue to dominate, even as the world opens up and we move closer to our pre-pandemic lives.

But despite the bumper results, the share price of all three giants actually fell. Why?

In Apple’s case, the share price fell because executives warned that a global chip shortage will continue and weigh on Apple’s iPad and iPhone sales in the next quarter. Apple’s chief executive, Tim Cook, said that he is concerned about a shortage of “silicon”, a term used interchangeably with computer chips.

Both Microsoft and Alphabet’s share prices fell in line with a tough day for stocks after Chinese regulators sparked a sell-off by clamping down on internet companies last week.

What's next?

So what is the outlook for the US big tech stocks?

As Adam Vettese, analyst at multi-asset investment platform eToro, puts it: “While Apple’s Q3 results have been impressive, it may struggle to repeat the magic in upcoming results, particularly if global supply problems start to hit sales.”

A bigger concern for the big tech firms is the spectre of higher taxes. The G7 countries – the UK, the US, Canada, Japan, Germanly, Italy and France – struck a historic agreement last month which aims to tackle tax avoidance by multinational corporations and paves the way for a global minimum tax rate of 15%. The Organisation for Economic Co-operation and Development said the rule should be put in place next year and kick in in 2023.

Another sore spot remains interest rates. Inflation fears may have calmed down somewhat, but some central banks may raise interest rates faster than was expected a few months ago.

Higher interest rates are likely to reduce the future value of many of these big tech companies’ and put a dent in their revenues.

So while tech stocks are at record highs and probably still have more room to grow, significant headwinds could put pressure on valuations.