QQQ heavyweights flex their earnings muscle

Earnings season just wrapped for five of the so-called Invesco QQQ ETF heavyweights: Apple, Amazon, Microsoft, Facebook and Alphabet. They’ve been considered heavyweights because of the sizable positions each have made up within QQQ. Over the course of 2020, the combined weight of these five companies represented 45.11% of the QQQ portfolio. And contributed 24.89 percentage points to total performance.

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Despite all the changes and uncertainty throughout 2020, these companies have been able to deliver solid financial results; and while we might have expected innovators to do just that, last year was anything but normal. The word “unprecedented” has been used ad nauseum to describe the events and business conditions of the past year yet, these companies have been able to grow their bottom lines and capture the momentum brought on by accelerated changes during the COVID-19 pandemic.

• All five companies reported the highest quarterly EPS and revenue figures in their history
• Apple and Amazon.com reported quarterly revenues in excess of $100 billion, the third and fourth companies in history to eclipse that figure (Wal*Mart and Exxon Mobil are the other two)
• The companies cited strong demand and investment in growing and emerging themes within the marketplace

With the growth of underlying QQQ holding companies, it follows that their success is reflected in the performance of the fund. And while we can’t expect this is a ‘new normal’, look at how they surpassed expectations:

Microsoft (MSFT)

The first of the five companies to announce, Microsoft reported Q2 2021 earnings after the close on January 26^th. The company surpassed analysts’ expectations on both earnings and revenue.

• Adjusted earnings per share (EPS) of $2.03 per share vs. estimates of $1.635, a 24.18% upside surprise. 
  • EPS grew by 34% vs. the same period a year earlier
• Revenue of $43.076 billion vs. estimates of $40.201 billion, a 7.15% beat 
  • This quarter’s 17% revenue growth vs. The same period one year earlier marks the 14th consecutive quarter that MSFT has grown revenues (Y0Y) by double digits
  • The last time it grew quarter-over-quarter revenue by under 10% was in the period ending June 2017.   
  • A large driver of that number was $65.6 billion in handset sales, higher than analysts' estimates for $60.3 billion. 
• Azure cloud saw growth of 50%, with the commercial cloud segment (which includes Azure) grew by 34% to $16.7 billion.
• MSFT saw gaming revenue surpass $5 billion for the first time.
• Subscribers to the corporate-driven Office 365 grew by 21%, with subscribers to the Consumer 365 suite grew by 28%.
• Sales guidance for the quarter ending March 31, 2021 for all three of MSFT business segments- Productivity (includes the Microsoft Office Suite), Intelligent Cloud (includes Azure & server software) and PC Sales (Includes Windows, Xbox and surface tablets)- all surpassed analysts’ estimates.

Microsoft’s Q2 2021 quarter underscored the importance of its cloud-based services in the work from home environment. The 20+% subscriber growth within its 365 ecosystem and Teams function is indicative of the shifts in the need for connectivity continues to be paramount in the post-COVID 19 world.

Apple (AAPL)

The tech giant reported Q1 2021 earnings on January 27^th and surpassed both EPS and revenue expectations. Apple hit the coveted $100 billion revenue mark for the quarter 

• Comparable adjusted EPS of $1.68 per share vs, estimates of $1.417, an 18.58% surprise. 
  • This figure represents a 35% increase from the same period one year earlier.
• Revenue of $111.439 billion vs. estimates of $103.116 billion, an 8.07% beat to the upside. 
  • The $100 billion revenue was a figure that investors had been talking about for some time, and in this quarter, Apple surpassed the historic mark for the first time.
  • Q1 revenue represents a 21% increase over the same period a year earlier.   
  • A large driver of that number was $65.6 billion in handset sales, higher than analysts’ estimates for $60.3 billion.
• AAPL noted robust consumer demand for the new iPhone 12 models with its 5G capability, and that demand certainly showed. Apple noted that it saw the most phone upgrades in its history, and reported that it has over 1 billion active iPhone users.

After concerns around iPhone sales in the quarter ended September 30th, 2020, Apple responded in a big way; eclipsing the $100 billion quarterly revenue mark. Consumers show their loyalty to the brand, while Apple continues to invest in upgrading their existing product set and developing new avenues for growth.

Facebook (FB)

The social networking goliath reported Q4 2020 results on January 27th and surprised to the upside on both EPS and revenue. 

• Q4 2020 EPS of $3.880 per share vs. estimates of $3.217, a 20.61% upside surprise 
  • Represents a 51.5% increase from the same period one year earlier.
• Revenue of $28.072 billion vs. estimates of $26.407 billion, a 6.30% beat.  
  • Revenue grew by 33% against the same period one year earlier.
• This quarter represents FB’s largest quarterly EPS and revenue figures reported in its history.
• Q4 daily active users of 1.84 billion (vs. est. of 1.83 billion) and monthly active users of 2.80 billion (vs. est. of 2.76 billion) both beat analysts’ expectations.
  • Daily active users represented an 11% increase over the same period a year earlier.
  • Monthly active users represented an increase of 12% of the same period a year earlier. 
• In looking forward to 2021, Facebook noted that consumer shifts towards e-commerce, and products over services helped advertising in 2020.
  • For 2021 advertising revenue could be negatively impacted by a change or moderation in those consumer trends. 
  • In the first half of 2021, advertising revenue will be compared to a year earlier, where advertising demand was lower in the earlier phase of the COVID-19 pandemic. The company expects year over year total revenue to accelerate or remain stable during this time period.
  • Facebook issued a more tepid outlook around the second half of 2021 from a year-over-year perspective after the company saw strength in 2020 growth and cautioned of potential ad-targeting headwinds.

Facebook’s growing user base shows that connectivity expands far beyond just the workplace and that a sense of community is of growing importance, particularly when those interactions are more difficult in person.

Amazon.com (AMZN)

Reported Q4 2020 EPS and revenue that surpassed analysts’ expectations and hit the $100 billion in quarterly revenue mark. 

• Q4 2020 Comparable EPS of $14.09 vs. analysts’ expectations of $7.343, a 91.88% upside surprise. 
  • EPS represents a 118% increase vs. the same period last year. 
  • For the calendar year 2020, net income climbed by 84% to $21.3 billion
• Amazon provided Q1 operating income guidance between $3.0 billion and $6.5 billion vs. $4 billion in Q1 2020.
• Revenue of 125.555 billion vs. estimates of $119.699 billion, a 4.89% beat. 
  • The revenue figure represents a 44% increase vs the same period last year.
  • For full-year 2020 net sales climbed by 38% to $386.1 billion.
  • Within Amazon Web Services (AWS) the company cited robust demand as well as new commitments with major companies across financial services, retail & e-commerce, technology, power and utilities and more. The division saw net sales of $12.742 billion, a 28% increase from the same period one year earlier.
• The company offered Q1 net sales guidance between $100 billion to $106 billion, representing 33%-40% growth versus the same period 2020. 
• Amazon also announced that CEO and founder Jeff Bezos will be stepping down in Q3, transitioning to an Executive Chair role and Andy Jassy, currently CEO of AWS will be replacing Bezos as CEO. 

Amazon continues to deliver on its cloud dominance, along with the expansion of offerings across consumer-driven lines of business such as Amazon Prime, Alexa, etc.  

Alphabet (GOOGL & GOOG)

A solid quarter aided by strength in Search and YouTube propelled Alphabet to surpass EPS and revenue expectations.

• Comparable EPS of $19.24 per share vs. estimates of $15.58, a 23,49% upside surprise. 
  • A 29% increase vs. the same period one year earlier. 
• Comparable revenue of $46.432 billion vs. estimates of $44.16 billion, a 5.15% upside surprise.
  • Revenue results represent a 23.6% increase vs. the same period a year earlier.
  • The revenue beat was driven by strength in both Search and YouTube ad revenue. 
    • Search business represented $31.9 billion in revenue, a 17% jump from the same period last year.
    • YouTube ad revenue of $6.9 billion represents a 46% increase from the same period a year earlier.
• Google Cloud revenue grew by 47% from the same period last year to $3.831 billion
  • Google Cloud reported an operating loss which was attributed to significant investment in the space across both infrastructure and personnel.
  • Backlog has grown significantly, and over time with greater scale, Alphabet expects operating loss and operating margin to improve and to contribute to profitability.

The search giant delivered strong growth across their search and YouTube offerings which fueled the EPS and revenue beat. Alphabet has recognized the increased demand for cloud-based offerings, and through their investment in Google Cloud look to grow that line of business.

A major investor focus of these companies has been profitability. The chart above shows trailing 12-month net income for Apple, Amazon.com, Microsoft, Alphabet and Facebook from 12/31/2015 through 12/31/2020. We look at trailing 12-month in an effort to smooth out some of the seasonality of individual quarterly results and in all five heavyweights’ case, net income has been trending higher. Per company growth of trailing net income from 12/31/2015 through 12/31/2020:  Apple 18.98%, Alphabet 146.32%, Microsoft 300.95%, Facebook 694.14% and Amazon with a staggering 3,479.03% growth.

Additionally, all five of the QQQ heavyweights reported greater than 28% earnings growth (low of 29%, high of 118%) and 16% revenue growth (low of 17%, high of 44%) vs. the same period last year. 

In these unprecedented times, it has become commonplace for companies to cite uncertainty and in reading press releases and transcripts, comments on the future certainly reflect that. To a certain extent, these companies have a tendency to under-promise and over-deliver as (according to Bloomberg) all five of these companies have exceeded average analysts’ EPS estimates for the past three quarters, and average analysts’ revenue estimates for the past four quarter. In the cases of Apple and Microsoft, the companies have reported quarterly EPS figures that surprised to the upside in 19 consecutive quarters. Apple has also reported quarterly revenues that surpassed average analysts’ estimates in 15 consecutive quarters, while Amazon and Facebook reported quarterly revenues that beat average analysts’ expectations in 9 consecutive quarters.

In the most recent quarter, these QQQ heavyweights once again seemed to flex their earnings and sales muscles. On an absolute basis, each of the QQQ heavyweights announced the highest quarterly EPS and highest quarterly revenue figures in their respective companies’ history. Within the announcement, we saw two $100 billion sales quarters doubling the number of companies that have surpassed that target on a quarterly basis (Wal*Mart and Exxon Mobil are the other two). While investors should not expect record-breaking numbers on a quarterly basis, the quarter was a strong showing from the heavyweights.

Within earnings transcripts for each of these companies, it became apparent that these companies have made significant investments and reference disruptive technological themes such as cloud computing, electric vehicles, 5G, e-commerce, streaming entertainment, big data, virtual reality. References to increased R&D spend and innovation were apparent as these companies continue their commitment to push the envelope in new and emerging business lines. As this quarter showed, QQQ heavyweights have continued to deliver on bottom-line results, and we believe that they are very well positioned to capture increasing demand for a number of transformative themes across the marketplace.