What to take away from US Q1 earnings? What to expect from Microsoft and Google?

As the US Q1 earnings season enters another week, about 80% of the US firms reporting earnings have beat estimates. Tesla was among them to post record profits, and a majority of big banks also presented better-than-expected figures. However, based on the market’s performance, it’s clear that investors are concerned and pessimistic over high-growth tech stock as Netflix reported its first subscription fall in over a decade.

Below are the three key findings from the recent reports.

Three takeaways from US Q1 earnings

1. Inflation pain (Telsa)

Tesla's Q1 earnings showed that the global EV leader had beaten the quarterly revenue forecast by posting record quarterly profit, buoyed by a strong demand for electric vehicles. Investors are encouraged by the fact that the price rise by the top-ranking brand has cushioned the company's profitability in response to inflation pressure and the impact of the Shanghai factory's shutdown.

However, under the rosy tint glasses, the leading automaker cautioned that production remained constrained by shortages and higher prices for key components, as cited in the report: 'Prices of some raw materials have increased multiple-fold in recent months. The inflationary impact on our cost structure has contributed to adjustments in our product pricing.'

2. Time is changing

Without little doubt, the top shock for Q1 earnings came from Netflix. The streaming giant’s share price dropped over 37% in two days and reached its four-year low.

The market is worried that the COVID boost to the streaming industry has come to an end thus the crush of Netflix’s share price was triggered by the company’s first net viewer fall in over a decade. As such, investors panicked over the unwelcomed milestone which has prompted a dramatic correction to the company’s future outlook.

3. Challenges ahead

JP Morgan kicked off this earning season but didn’t have a good start with first-quarter profit falling 42% from a year ago, dragged down by the Ukraine war, inflation, and supply chain problems. The largest lender in the US also reported a 28% drop in investment banking revenue and a 31% fall in investment banking fees due to lower equity and debt underwriting activity. As quoted in the report: 'We remain optimistic on the economy, but see significant geopolitical and economic challenges ahead.'

What to expect for the rest of the week?

26 April - Microsoft

Microsoft’s revenue for the March quarter is expected to be powered by demand for its cloud service which is leading the crowd with Amazon and Apple (charts below). Despite the challenging start to the year (that has sent its share price down by 16%), the market is still confident of its growth capability and thus expects the quarterly EPS to jump up to $2.18 per share vs. $1.95 in 2021 Q3.

According to Microsoft’s earnings call guidance in the previous quarter, the company’s cloud revenue will keep the momentum to reach as high as $19 billion. In addition, the productivity and business processes division is expected to bring in a revenue between $15.6 billion and $15.85 billion. Overall, the market is looking for more uplifting figures from Microsoft to demonstrate strong stands to capitalize on solid trends across its diverse segments.

26 April - Google (Alphabet)

Last week Alphabet’s share price was down more than 14% year-to-date but the expectation for Q1 is for revenue to be up 23.1% year-on-year with a 20% higher EBITDA.

Despite the anticipation for the world’s search engine giant, its growth outlook is expected to be slowing down (as shown in the EPS chart below). The high double-digit rates set in the wake of the pandemic recovery is likely to become history, leading to a combination of weaker ad-spend due to the slower economy. The shift of user engagement after the pandemic will be the key challenge ahead for Google.

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