S&P 500: What Snap’s results signal for big tech this week
More than 30% of S&P 500 companies are reporting Q3 earnings this week, and with a cross section of sectors reporting at once, the market will be sensitive to how US mega-cap tech stocks are performing in the current environment. After a strong start to earnings season, with more S&P 500 companies beating EPS estimates than usual and beating EPS estimates by a wider margin than usual, according to FactSet, the bar is unusually high for the tech giants and other US corporate bellweathers who report earnings this week.
No sign of a Snap back yet
As we embark on a big week for tech earnings, we need to explain what happened at the end of last week, and why it could give tech investors the shakes ahead of this week’s earnings reports. Snapchat, the social media company, beat Q3 earnings estimates, however, it fell short on sales and its Q4 earnings outlook was also below estimates. Snapchat now estimates Q4 earnings to be between $1.16bn and $1.2bn, which was well below the lower bound of analyst estimates at $1.36bn. The market is not treating earnings misses lightly, and Snap’s stock price fell a whopping 25% at the end of last week. It also fell below its 200 -day moving average, which is an extremely bearish sign and possibly triggered some automated sell-offs late on Friday. This is one reason why the stock did not attract a bid late on Friday, even after such a large sell off. Snap’s performance is a stark warning to tech stocks: if you miss earnings expectations or post unattractive earnings outlooks you will be punished.
Facebook and Twitter in the firing line
This week’s earnings reports for Twitter and Facebook will be important from both a fundamental and a technical perspective. Facebook and Twitter fell 5% and 4% respectively on Friday, and both are uncomfortably close to key technical support levels. After falling 5.4% on Friday in heavy trading volume, Facebook is now closer to testing its 200-day moving average. A weak earnings report on Monday, when it reports Q3 results after the market close, could be enough to push it below this level. As we mention above, a break below the 200-day moving average is a negative technical development that could trigger a wave of further selling, even if some bad news is already baked into the Facebook share price after its sharp drop on Friday. Likewise, Twitter, who reports results on Tuesday, will also need to watch out, as a negative earnings report could trigger another leg lower for the micro-blogging site as it is currently testing its 50-day moving average.
Social media companies: advertisers in disguise
The market was particularly unhappy with two aspects of Snap’s Inc’s earnings report. Firstly, Apple’s changes to its privacy settings on the iPhone impacted Snap’s advertising business more than anticipated, which made it harder for advertisers that use Snap’s platform to manage their ad campaigns on Apple devices. Snap’s CEO also said that global supply chain woes and labour shortages reduced “short-term appetite to generate additional customer demand through advertising.” This was unexpected – many in the market had thought that the tech giants including Snap and Facebook, would be relatively safe bets during this period of high inflation, supply crunches and a global labour shortage. However, if you don’t have the supply to meet demand then you don’t waste money on advertising. This nugget from Snap’s results highlights the main problem for some online-only big tech firms and for the global economy as a whole.
Big tech: no harbour in the storm of global economic fears
It turns out that social media companies are not the harbour in the storm that some thought. It is worth remembering that Snap, Twitter and Facebook, receive a huge amount of their revenues through advertising. Last quarter, Facebook reported a 56% rise in advertising revenue compared with 2020, and advertising generated an enormous $28.6bn of revenue to the social media giant. These companies have evolved to become online ad platforms with a bit of social media on the side. Until Facebook delivers on its “metaverse” or Alphabet delivers its self-driving car, it’s future revenue streams are at the mercy of economic cycles just like any of the other major advertising companies. A better comparison for how social media may perform in the midst of the current economic headwinds is to look at the performance of global advertising giant WPP, which is a member of the FTSE 100. Its share price has struggled this month and has been erratic since reaching its YTD peak in June. As you can see in the chart below, WPP, Facebook and Twitter have mostly been moving in the same direction in recent months, thus, if we don’t see WPP’s share price pick up, it could be hard for these tech giants to recoup recent losses.
Alphabet at risk
Alphabet, Google’s parent, reports earnings on Tuesday after the market close, and we think that Alphabet could also be at risk from the Snap curse, because of its heavy reliance on advertising. It’s worth remembering, that any upside surprise, or sign that these tech giants are not going the same way as Snap and remain resilient in the face of the supply chain crunch, would be a bigger surprise for the market at this stage and could cause a wave of buying and a short-term recovery for big tech.
Earnings reports for your diary
Other earnings reports to watch out for include Microsoft (Tuesday), Apple (Thursday), and Amazon (Thursday). We think that these three firms could perform better than Alphabet and the social media companies because they are mostly hardware and services driven, however, we still expect supply chain issues to weigh on their crucial Christmas seasons. Out of the hardware giants, we like Apple the best. While we will be watching out for signs that supply chains are causing stress to Apple’s product delivery schedule, we will also be watching demand for its goods. If demand remains strong, and if Apple has a decent plan to ameliorate its supply chain problems, then its stock price could out-perform its rivals in the medium-term.