Upcoming Tech Earnings: AMZN, GOOGL And MSFT Report After The Closing Bell

So far this year, info tech has been one of the best-performing sectors, with the S&P Technology Select Sector Index (IXT) up about 24.7% year-to-date. Today is one of the heaviest tech days for quarterly earnings and some of the biggest companies in the sector are reporting; Amazon.com, Inc. AMZN, Alphabet Inc GOOG (NASDAQ;GOOGL) and Microsoft Corporation MSFT all report earnings after the closing bell.

FIGURE 1: AMZN, GOOGL AND MSFT YTD PERFORMANCE. AMZN is charted above compared to MSFT (teal line) and GOOGL (purple line). YTD performance as a percentage is shown on the right hand side. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Amazon Earnings and Options Trading Activity

Amazon Prime Day occurred at the start of the period and those results will be reflected in today’s release, with analysts widely expecting the discount-heavy day to boost the quarter’s top-line, but put downward pressure on profit margins. This quarter will also include about five weeks of Whole Foods results after that transaction closed in late August. For the quarter last year, Whole Foods had reported $3.5 billion in revenue and net income of $88 million.

While the third quarter has been considered an important one with Prime Day, analysts have placed a lot of emphasis on the company’s fourth-quarter guidance. In 2016, Q4 accounted for 32% of its revenue for the year, according to AMZN.  In Q4 this year, Wall Street consensus is currently expecting about $54.2 billion in revenue.

Historically, AMZN’s e-commerce platform has generated the majority of its revenue, while the Amazon Web Services division has been its most profitable, making it a common focus among analysts and investors.

In the second quarter, the company reported $4.1 billion in revenue and operating income of $916 million for Amazon Web Services. For its general merchandise operations in the same quarter, AMZN reported $22.37 billion in revenue and $436 million in operating income its North America segment, and $11.49 billion in revenue and an operating loss of $724 million in its international segment.  

FIGURE 2: AMAZON COMPANY PROFILE. The chart above shows the divisions of Amazon that are considered key drivers of the stock. Amazon Web Services and the company’s general merchandise operations make up a significant portion of the company. TD Ameritrade clients can analyze a company’s potential revenue drivers on the Fundamentals tab on the thinkorswim® platform. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

For the third quarter, AMZN is expected to report an adjusted earnings of $0.01 per share, down from adjusted earnings of $0.52 in the prior-year quarter, on revenue of $41.97 billion, according to third-party consensus analyst estimates. Many analysts are expecting lower earnings this quarter due to heavier investments in fulfillment centers, acquisitions, international expansion and Prime Video content.

The stock traded down to $931.75 back on September 25 and bounced higher off that level in the following weeks, breaking back through the $1000 mark on October 12. It has given up a little ground since then and closed at $972.91 yesterday.  

Options traders have priced in about a 3.5% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the October 27 expiration, calls have been active the 975 and 1000 strike prices, while puts have been active at the 950 and 975 strikes. As of this morning, the implied volatility sits at the 75^th percentile.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Alphabet Earnings and Options Trading Activity

GOOGL’s primary money maker is its advertising business and in the past has generated the vast majority of its revenue and earnings. Growth in paid clicks, the number of ad clicks and impressions GOOGL collects revenue on, grew 52% year-over-year in the second quarter. Management attributed that growth to increased mobile search ads and YouTube ads. At the same time, GOOGL reported a 23% drop in cost per click.

GOOGL has also reported increased total acquisition costs (TAC) in recent quarters and CFO Ruth Porat has attributed that to higher growth in the areas that carry TAC—mobile search and programmatic advertising. GOOGL has indicated that trend could continue as it continues to focus on mobile advertising.

In the second quarter, GOOGL reported that its Other Revenue segment, which includes Hardware, Cloud and Play,  grew 42% year-over-year to $3.1 billion. Management attributed that growth to newer revenue streams as well as strength in Google Play. The company also just rolled out quite a few new hardware products at the start of October.

Its smallest segment, Other Bets, includes divisions Waymo, Nest, Fiber, Verily, Calico and others. In the past, that segment has consistently lost money and GOOGL reported a $772 million operating loss in the second quarter for it.

GOOGL is expected to report adjusted earnings of $8.43 per share on revenue on revenue of $21.94 billion, according to third-party consensus analyst estimates. In the same quarter last year, GOOGL reported adjusted earnings of $9.06 per share on revenue of $18.27 billion (Keep in mind there are different accounting methods that analysts and companies use to determine numbers, which can change over time as new rules are implemented, resulting in variations).

The stock has had quite a run since mid-September, when it was trading near $930. Since then, it rallied to a new all-time high of $1016.31. It has pulled back slightly and closed at $991.46 yesterday.

Around the upcoming earnings release, options traders have priced in about a 3.4% potential share price move in either direction for GOOGL shares, according to the Market Maker Move indicator.

In short-term options trading at the October 27 expiration, calls have been active at the 1000 strike price, while puts have been active at the 950 and 975 strikes. As of this morning, implied volatility is on the high end of the range and sits at the 91^st percentile.

Microsoft Earnings and Options Trading Activity

Like many of the legacy tech companies, analysts have been focused on the company’s older offerings and its newer cloud-based offerings. In the second quarter, MSFT reported a 21% year-over-year increase in its productivity and business processes segment, which the company attributed to strong growth in Office 365 and Dynamics 365.

Microsoft Azure, the company’s cloud-based offerings similar to Amazon Web Services, grew 97% year-over-year in the second fiscal quarter, according to the company. At the same time, the company has reported double-digit growth in its cloud-based products, its legacy businesses have beat analyst estimates, and has contributed to some of the company’s recent top- and bottom-line beats.

For its fiscal first quarter, MSFT is expected to report adjusted earnings of $0.72 per share on revenue of $23.53 billion, according to third-party consensus analyst estimates. In the same quarter last year, MSFT reported adjusted earnings of $0.76 per share on revenue of $22.33 billion.

The stock has moved up considerably from where it was at the end of September and  just hit a new all-time high of $79.34 on October 23. Heading into earnings, it’s not too far from that high and closed at $78.63 yesterday.

Options traders have priced in about a 3.1% potential share price move in either direction around MSFT’s upcoming earnings release, according to the Market Maker Move indicator. In short-term trading at the October 27 expiration, calls have been active at the 79.5 and 80 strikes and on the put side the 76 and 77.5 strikes have seen the most activity. As of this morning, the implied volatility is at the 80^th percentile.

Looking Ahead

Next week, several other major tech companies will report their results. Facebook Inc FB reports earnings after market close on Wednesday, Nov. 1 and Apple Inc. AAPL releases its results after the closing bell on Thursday, Nov. 2. Don’t forget to check out today’s market update to see what else is happening out there.

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