The big three internet giants today revealed improved earnings despite and in some cases thanks to the COVID-19 pandemic, as advertising and cloud computing growth buoyed third-quarter results.
As online ads saw a rebound, Google LLC owner Alphabet Inc. reported a profit of $11.2 billion, or $16.40 a share, up 59% from a year ago. Revenue rose 14%, to $46.2 billion — a big reversal of the second quarter’s 2% revenue decline. Analysts polled by S&P Global Market Intelligence had forecast profit per share of $11.18 on revenue of $42.8 billion.
“We had a strong quarter, consistent with the broader online environment,” Alphabet and Google Chief Executive Sundar Pichai said in a statement. “It’s also a testament to the deep investments we’ve made in AI and other technologies, to deliver services that people turn to for help, in moments big and small.” Chief Financial Officer Ruth Porat cited higher advertising spending as well as Play and Cloud growth for the upturn in revenue.
Continuing a pandemic-fueled boom in online and cloud computing spending, Amazon.com Inc. reported a profit of $6.3 billion, or $12.37 a share, triple a year ago, on a 37% jump in revenue, to $96.1 billion. Analysts had figured a profit of $7.23 a share on revenue of $92.4 billion.
And Facebook Inc., also benefiting from a continuing resumption of online advertising, reported a profit of $7.8 billion, or $2.71 a share, up 29% from last year. Revenue rose 22% — far better than last quarter’s tepid 10% rise — to $21.5 billion. Consensus forecasts had called for a profit of $1.90 a share on revenue of $19.75 billion.
Overall, the results, like others among recently reporting tech companies such as Microsoft Corp., ServiceNow Inc. and Samsung Electronics Co. Ltd., were better than expected given COVID-19-related disruptions, though investors weren’t thrilled across the board.
Alphabet’s shares rose as much as 9% in after-hours trading, Amazon’s fell almost 2% on a disappointing fourth-quarter operating profit forecast, and Facebook’s fell more than 2%. But in regular trading today, all the stocks helped lift the S&P 500 by about 2% as Facebook shot up about 5%, Alphabet rose 3% and Amazon rose 1.5%. Apple Inc. rose 3.7% in regular trading but shares were falling 4% after-hours following an earnings report in which it declined to provide current-quarter guidance.
Tech firms in general, especially the largest ones, have largely escaped what downdraft in stock prices there has been since the pandemic hit in March, thanks to factors such as more demand for ecommerce, collaboration tools and cloud computing as consumers, enterprises and schools pivot to digital platforms. Indeed, if not for the big five so-called FAANG stocks — Facebook, Apple, Amazon, Netflix Inc. and Google/Alphabet — the S&P 500 would be down 4% on the year instead of up 2%, according to Bespoke Investment Group.
Still, the outlook remains murky given the swirl of a pivotal U.S. election next week, ongoing antitrust and other investigations, and the worsening COVID-19 pandemic. “Looking ahead to 2021, we continue to face a significant amount of uncertainty,” summed up Facebook Chief Financial Officer David Wehner.
In particular, changes in Section 230 of the Communications Decency Act under which tech firms such as Google, Facebook and Twitter can’t be held responsible for content posted by users on their platforms, which were the subject of a congressional hearing Wednesday, could result in big changes to the platforms.
“If that were to be changed and the vendors themselves were to be responsible for user content on their platforms, it would dramatically affect the advertising models and revenue of these companies,” said Nucleus Research analyst Daniel Elman. “They would have to transform their offerings as we are familiar with them now and this would inevitably impact performance in the short/medium term.”
Focus on cloud
For Amazon and Google, cloud computing remains a central focus even though it’s a relatively small portion of revenue, for different reasons. Amazon Web Services inc. brings in a large chunk Amazon’s overall profit, and Google is playing a concerted game of catch-up as the No. 3 or 4 provider behind AWS and Microsoft, which got an earnings boost from its cloud operations Tuesday.
Elman noted that customers of all size organizations and industries are “increasingly acquiring cloud technologies and services to help insulate from disruption caused by COVID-19.”
AWS’ revenue rose 29%, to $11.6 billion, and operating income jumped 56%, to $3.5 billion. Google doesn’t report cloud profit, but revenue rose 45%, to $3.4 billion.
Pichai cited three drivers for Google Cloud growth: data processing and analytics, strength in data center and multicloud and new hybrid work environments. “We’re seeing significant growth in demand” for collaboration products, he said.
The CEO also said it’s working on breaking out its cloud computing unit to report spending and potentially profits, a sign that the unit is becoming significant as a growth driver along with search and YouTube advertising.
Elman said Google Cloud has successfully leveraged its customer momentum. “This should persist into future quarters as the demand for cloud certainly won’t go down in the near future,” he said.
“Google Cloud had another very good quarter, still the fastest growing part of the company and rising 45% over the year, as larger numbers of companies moved their work to cloud services, enabling their staff to work remotely and helping to lower their computing costs,” said Martin Garner, chief operating officer of CCS Insight.
As for Amazon, Elman said AWS continues to “set the market standard” for cloud technology and services. “With customer demand set to remain high (and even grow), these strong numbers should only improve into the future as more organizations spend on cloud resources and technology,” he said. “These contracts typically never shrink, rather they grow year over year as the customer continually grows their usage of (and billable value to) AWS.”
That said, Amazon Chief Financial Officer Brian Olsavsky said on an earnings call that cloud customers in some industries are reducing spending. “While overall demand for cloud services is increasing and more companies are moving their work to the cloud, some existing customer sectors — such as travel — are experiencing dire conditions and are having to cut their cloud spending,” said Garner.
Despite the attention on cloud computing, advertising remains the key driver for Alphabet and Facebook — and it’s even becoming a key growth market for Amazon. And it appears that the depressed ad spending from early in the pandemic when so many people were homebound is easing quite a bit.
eMarketer principal analyst Nicole Perrin said the firm expected a recovery in Google ad revenue, but search, YouTube and ads on other sites all outperformed expectations. “That was especially true of YouTube, which posted 32% ad revenue growth over last year, pointing to advertisers’ continued desire for video inventory, the return of brand spending, and notable increases in political ad spending during the quarter,” she said.
Andrew Lipsman, an analyst at eMarketer, noted that Amazon’s profit soared not only on strong growth in third-party seller services but also a “big acceleration in Amazon’s high-margin ad business as the digital ad market recovered.” Amazon’s “other revenue,” mostly advertising, rose 51% from a year ago, to $5.4 billion, implying close to a $20 billion annual ad business.
Not least, Facebook also rebounded in advertising, which was affected not only by the pandemic but also an ad boycott in July by many advertisers. “Despite its challenges with election turmoil and content moderation, it remains a go-to for advertisers seeking to engage a broad base of consumers,” said eMarketer principal analyst Debra Aho Williamson. “Looking ahead to 2021, we expect that more advertisers will take a hard look at their reliance on Facebook and will ask themselves whether the environment is safe for their brands. But for now, heading into the all important holiday season, Facebook’s financials look very strong.”
Still, it’s continuing to spend on future markets, so that could have an impact on profits. “Facebook is still upbeat about its opportunities for the next few years such as integrating its messaging systems, shopping services and virtual reality,” said Garner. “Its investment in new product areas is running ahead of its sales growth, so although its margins have recovered well from Q2, they are running lower than levels that investors enjoyed last year.”
Looking forward, Amazon said it expects fourth-quarter net sales to rise 28% to 38%, to between $112 billion and $121 billion. It also forecast a wide range of operating income, between $1 billion and $4.5 billion, compared with $3.9 billion in last year’s fourth quarter. Wall Street had forecast a $5.8 billion operating profit, which explains investors’ negative reaction, but Amazon said it will spend $4 billion on COVID-related safety costs, up from $2.5 billion in the third quarter.
Facebook said it expects fourth-quarter ad revenue growth to be higher than the third quarter’s, thanks to holiday ad spending. The social network also forecast 2020 total expenses of $53 billion to $54 billion, narrowing the previous range slightly. Capital spending is expected to be about $16 billion this year, unchanged from its previous guidance, and it forecast $21 billion to $23 billion for next year.
Investors’ tepid reaction may be because Facebook noted that daily and monthly active users in the U.S. and Canada “declined slightly” from the third quarter, and it said it expects that trend to continue in the current quarter.
Alphabet doesn’t provide specific earnings guidance.
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