Company / Analytics

Analytics, 02 November 2022

Q3 earnings season: Megacaps continue to fall

October saw a series of third-quarter earnings report releases, with more than half of the S&P 500 companies posting their earnings. The trend so far is that 72% have topped analysts’ consensus earnings estimates, below the five-year average of 77%. This has done little to add confidence to investors as most companies’ shares have trended lower.

Companies on Wall Street reported challenges including persistent inflation, rising interest rates, and a generational surge in the dollar that has pressured revenue generated overseas as reasons for their dismal performance in generating profits. While some corporate leaders noted glimmers of hope for consumers and the economy, investors continue to navigate markets with extra caution as mixed trading continues to be recorded in equities markets.

In this article, we analyze the earnings reports of two mega-cap US companies namely Alphabet and Meta, and how their earnings releases affected their company shares in the equities markets.

Alphabet earnings and stock price

On 25th October 2022, Alphabet released its third-quarter earnings report, indicating weaker-than-expected earnings and revenue for the third quarter, and said it would significantly decrease headcount growth.

Year-on-year revenue growth slowed to 6% from 41% as the company struggled with continued downdraft in online ad spending. This was the second-weakest growth period since 2013, the other weaker period being over the covid-19 pandemic period. The posted revenue was short of analysts’ expectation of $70.58 billion, with the company announcing revenue of $69.09 billion. However, Alphabet reported overall advertising revenue of $54.48 billion during the quarter, up slightly from the prior year.

Advertising revenue from YouTube also slid year-on-year, with the company reporting $7.07 billion, 2% lower than last year’s 7.21%. Analysts had expected a 3% year-on-year rise with a consensus expected estimate of $7.42 billion in revenue.

Google Cloud services reported higher earnings than the year prior when the department generated $5 billion. Google Cloud beat earning estimates of $6.69 billion and reported $6.9 billion, a 38% year-on-year increase. Google Cloud, however, still posted $699 million in losses this quarter, up from $644 million in Q3 2021. The infrastructure business, Google Cloud Platform, is growing, but it’s still struggling as the No. 3 cloud provider behind Amazon and Microsoft. Google says it’s taking a “longer-term path to profitability” with its Cloud Platform.

In terms of profitability, the company reported a 27% drop in profits compared to last year. Profits were at $13.9 billion, down from $18.9 billion in Q3 2021. Earnings per share were reported as $1.06 versus the $1.25 expected estimate. Alphabet shares dropped 7% on the day the report was released and are now down 14%.

Current Alphabet Inc Class A stock price is 90.59 USD per share.

Meta earnings and stock price

A day after Alphabet’s earnings report, Meta released their third-quarter earnings report where earnings came up well short of Wall Street’s expectations, posting consecutive quarters of losses. Facebook also issued a weak forecast for the fourth quarter.

Similar to Alphabet, Meta is also struggling with a broad slowdown in online ad spending. TikTok’s competition has also weighed down on the company in recent years, and the new Apple iOS privacy update that is poised to take away a huge chunk of Facebook’s data source has done more damage to the company’s revenues.

Revenue was $27.71 billion, a decrease of 4% year-over-year, and an increase of 2% year-over-year on a constant currency basis. Had foreign exchange rates remained constant with the third quarter of 2021, revenue would have been $1.79 billion higher. Revenue was also higher than the forecasted consensus estimate of $27.38 billion. However, Meta failed to reach Wall Street’s forecast of $1.89 in Earnings per share, reporting an EPS of $1.64.

While revenue fell 4% in the third quarter, total costs and expenses were $22.05 billion, an increase of 19% year-over-year. This includes an impairment loss of $413 million for certain operating leases as part of our ongoing work to align our office facilities footprint with our anticipated operating needs. Operating income declined 46% from the previous year to $5.66 billion. Overall net income was down 52% to $4.4 billion in the third quarter.

Revenue in the Reality Labs unit, which houses the company’s virtual reality headsets and its futuristic metaverse business, fell by almost half from a year earlier to $285 million. Its loss widened to $3.67 billion from $2.63 billion in the same quarter last year. Reality Labs has lost $9.4 billion so far this year, and there’s no end in immediate sight.

Meta’s shares continue to to plung lower as it has this entire year. The stock dropped 19% in extended trading on Wednesday 25th following the release of the report. The stock is now 27% lower than it was before the report, and 72% down year to date.

Current Meta Platforms Inc stock price is 94.42 USD per share.

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