A Gusher Of Oil Earnings With Exxon And Chevron Beating Estimates

Key Takeaways:

• Apple and Amazon Disappoint but Exxon Mobil and Chevron Surprise
• Big Tech Battles Above the Clouds
• Cloud Computing Has Changed Business

This week was supposed to be about big tech and technology but it’s really been about shortages and supply chain problems. Apple and Amazon disappointed investors because of their inability to get products to consumers. This raised concerns about whether brick and mortar stores can meet holiday demand. Right now, it’s a cloudy picture.  

One of the most anticipated earnings announcements finally came Thursday after the close when Apple (AAPL) announced better-than-expected earnings but lower-than-expected revenue due to lower sales. Apple has been telegraphing that sales would be a problem due to supply chain issues and component factory shutdowns in China over energy shortages. However, the stock still traded 3.4% lower in after-hours trading.

Another highly anticipated report came from Amazon (AMZN), which was down more than 4% in after-hours trading after missing on earnings and revenue. The company was hurt by product shortages, higher wage costs, higher shipping expenses, and operational investments, but it also emphasized that it’ll do “whatever it takes” to ensure a good holiday season. However, Amazon Web Services, the company’s cloud computing platform, grew 39%.

Are the FAANG stocks going to have to change their acronym? First, Google changed to Alphabet, and now Facebook (FB) is changing its name to Meta. The new name is meant to reflect the company’s goal on metaverse and not just the Facebook social media app. The metaverse includes other social media apps like Instagram, Oculus, and WhatsApp. The company is also changing its stock symbol to “MVRS” starting December 1.

Outside of technology, Starbucks (SBUX) beat on top- and bottom-line estimates but still traded 3.83% lower in after-hours trading. The company continues to feel the negative effects of the pandemic and continues to be hurt by sales in China. Continued COVID-19 outbreaks in China are slowing down consumer spending.

However, the Energy sector is in focus Friday morning as Exxon Mobil (XOM) and Chevron (CVX) announce better-than-expected earnings and revenue. Exxon reported a 30% increase in average daily production of oil barrels from the Permian basis. The company spent much of the third quarter paying down debt, but now it plans to buy back shares in 2022. The stock rose more than 1% in premarket trading.

Chevron appears to have impressed investors a little more than Exxon did because it was trading 2.79% higher before the opening bell because it had a much bigger beat on earnings. The company reported that surging natural gas prices and its oil-refining business drove its rising revenues. Chevron also announced plans for a stock buyback program.

Despite Thursday’s rally, stock futures are pointing to a lower open. This week has been a battle between creating record highs and selling off. It’s hard to say if stock will follow through on yesterday’s rally or if it’s a “take profits Friday”.  

Head in the Clouds

Thursday’s earnings report form Amazon saw more focus on cloud computing. Cloud computing is the ability to access computer system resources over the internet on-demand. This includes servers, data storage, databases, networking, software, analytics, and intelligence. The cloud can scale for the size of a business because users are commonly charged only for what they use. This helps reduce operating costs and increase efficiency.  

There are many tech companies with their head in the clouds, including Amazon, Microsoft (MSFT), Alphabet (GOOGL), Alibaba (BABA), Oracle (ORCL), IBM (IBM), and Tencent (TCEHY). These groups all provide “Infrastructure as a Service” (IaaS). While Amazon is the leader in cloud services, Microsoft’s Azure is growing very fast. In its earnings call earlier this week, Microsoft reported a 36% increase in its cloud segment over the last year. In fact, cloud computing has become the largest business segment for Microsoft.

Cloud computing can be quite profitable with high margins. However, most companies don’t like to reveal their gross margin on cloud services. In a 2019 report by Technology Business Research, it estimated that cloud-operating margins were around 15%, while gross margins were more than 65%. Last month, CNBC reported that Bernstein analysts estimated that Amazon Web Services had a gross profit margin of 61%.

Rain Gauge: When trying to compare cloud infrastructure companies, it can be difficult to determine a leader by just looking at a stock chart. This is because these companies are very large and have many other business segments. For example, IBM reported worse-than-expected earnings this week but saw double-digit growth in its cloud-related businesses.

 Additionally, many of these companies work in cloud infrastructure as well as platforms and software. So, there’s a lot of overlap. According to Statista, after 2021 Q1, Amazon had the largest market share of cloud infrastructure followed by Microsoft Azure, Alphabet, Alibaba, IBM Cloud, Salesforce, Tencent, and Oracle.

Cloud Seeding: Cloud infrastructure can be navigated using a platform. Platforms are computing models from a third party that helps sift through, organize, and analyze the data. Companies that offer “Platform as a service” (PaaS) help other businesses get the most out of their data. Microsoft, Alphabet, and Oracle all provide platforms.

Recently, some PaaS companies haven’t performed as well. One of which is Shopify (SHOP), an e-commerce platform that helps merchants set up online stores along with catalogs and shopping cart functionality. It didn’t fare so well earlier this week after missing earnings and revenue estimates. Twilio (TWLO) actually beat on earnings estimates but offered a weak earning’s forecast. It’s a cloud platform that helps software developers manage their communications.

Rain Collection: The next level of cloud services is software or Software as a Service (SaaS). These groups help users connect to applications through the internet usually on some kind of subscription basis. There are numerous SaaS companies including Adobe (ADBE), Intuit (INTU), Netflix (NFLX), Slack (WORK), Zoom (ZM), and so on. Amazon, Alphabet, and Microsoft are players here as well.

Many of these companies have benefited from the “work from home” trend prompted by the pandemic, but others are more established businesses partners. The cloud has changed the way business is run, and it will likely continue to evolve. Investors who are willing to put in the time to stay on top of the space may find the silver linings in some of these clouds.

TD Ameritrade® commentary for educational purposes only. Member SIPC.