Greetings!
Fasten your seat belt. Next week kicks off the tech earnings season. And we’re in for some extraordinary numbers as companies report second-quarter results that compare with the pandemic-depressed period from a year ago. That will make for somewhat artificially inflated growth rates this time around that are sure to grab headlines. To get a real sense of the underlying growth rate, it will be necessary to take a longer-term point of view.
Twitter’s results next week, for instance, will appear much better than they really are (see below for more details). But earnings from tech giants like Alphabet and Facebook, due later this month, will probably get the most attention. Analysts are expecting Facebook to report 49% higher revenue, while the Google parent is expected to post a 46% jump, according to data from S&P Global Market Intelligence. Those numbers are stunning, particularly for Google, which until 18 months ago was reporting topline growth of 15%-20%.
Critics of these companies’ market power are sure to jump on these numbers as proof of their rapacious growth. As we saw in the first quarter, the digital ad market is booming, accelerating growth rates and market share gains of both big and small companies (Snap, for instance, may post the greatest percentage growth, as we detail below). But the increases are a little less noteworthy when you remember that the second quarter of last year was the nadir of the pandemic, particularly for Alphabet, whose revenue fell slightly from a year earlier. Facebook’s results will be arguably more meaningful as it didn’t suffer as much during the pandemic.
It’s the opposite story with last year’s winners. Take Netflix, which reports on Tuesday. The video streaming giant’s growth rate was turbocharged by the pandemic as people stuck at home were glued to the TV. Netflix executives emphasized repeatedly last year that its accelerating growth was being pulled forward from future growth. We’ve already seen how things have slowed since: Netflix reported lower-than-projected subscriber growth in the first quarter of this year and its second-quarter projections called from negligible increase in subscribers. Investors are overlooking this context in deserting the stock.
Quarterly earnings are never an ideal way to judge companies’ long-term performance, given the momentary blips that can distort results. But this quarter’s results are likely to be even more distorted than usual, which will be worth remembering over the next few weeks.
NEXT WEEK’S EARNINGS OUTLOOK
Aside from Netflix, Snap and Twitter report next week. Here are the details of what to watch for, with data courtesy of S&P Global Market Intelligence.
Netflix (Tuesday)
Expected Q2 revenue: $7.3 billion +19%
Expected EPS: $3.16 +99%
Expectations for Netflix rest on the company’s detailed projections. Netflix estimated it would add only one million new subscribers globally in the quarter, down from 3.98 million in the first quarter which was itself well below projections. A year ago, Netflix added 10 million subscribers, about a third more than it had projected. Things have come back down to earth.
Snap (Thursday)
Expected revenue: $845.8 million +86%
Expected EPS: (0.18) compared with (0.23)
This quarter may well be the high water mark for Snap, at least in terms of revenue growth rate. The messaging company was one of the winners of the pandemic, skating through the worst of times with better growth than most of its ad-dependent peers. And it accelerated from there. In the past couple of quarters, Snap has reported growth of more than 60%, well above its pre-pandemic growth rate. Worth watching will be Snap’s bottom line, including whether it generates much cash. Last quarter was the first time it had generated real cash.
Twitter (Thursday)
Expected revenue: $1.062 billion +55%
Expected EPS: 0.13 compared with ($1.56) a year earlier
To gauge Twitter’s true performance this quarter, look back two years. Otherwise you’ll be overly excited. Among ad-dependent tech firms, Twitter was one of the worst affected by the pandemic. Its revenue fell 19%, as Twitter’s exposure to live-event advertising proved a major weakness when live events got canceled. Revenue growth picked up after that, although nowhere near as much as its rivals like Snap, Pinterest, Facebook or Google. The latest quarter looks good, but if you compare revenue to the second quarter of 2019, it looks much less impressive: up 26%.
