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This week in tech: Amazon 'fired on all cylinders' in Q2; Apple, PayPal sink

Published 08/06/2023, 06:11 AM
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By Louis Juricic and Sarina Isaacs

Investing.com -- Here is your weekly Pro Recap on the biggest headlines out of tech this week: Amazon triumphs; AMD shares are whipsawed; and Apple, Qualcomm, and PayPal disappoint.

InvestingPro subscribers get scorching tech headlines like these in real time. Never miss another market-moving alert.

Amazon smashes Q2 estimates

Amazon (NASDAQ:AMZN) surged 8% Friday after the tech giant blew Q2 estimates out of the water and nicely topped guidance revenue, riding high off strength in its cloud business.

Amazon said its profit came to $0.65 for the quarter - $0.30 better than the consensus of $0.35 - on revenue of $134.4 billion, which also surpassed the $131.45B average analyst estimate.

Amazon Web Services, which comprised 70% of its Q2 operating profit, jumped 12% to $22.1B - ahead of estimates for 10.2% growth. The company said this surge came as customers "started shifting from cost optimization to new workload deployment."

For the third quarter, the company expects revenue of $138B to $143B vs. estimates for $138.28B.

Bernstein called the print "a defining moment" during CEO Andy Jassy's tenure, which started about two years ago, and hiked the company's price target by $20 to $175 per share. Bernstein added:

Amazon fired on all cylinders: AWS finally stabilizing and now a coiled spring; Retail performance hanging in with a weakened consumer; N. American retail margins are back to pre-pandemic levels and accelerating alongside compressing fulfillment windows — impressive; and aggregate operating profits are up and to the right.

BofA said Amazon remains "our top stock in sector" given Amazon's retail cost improvement efforts, saying it expects "several more quarters of margin benefits from increasing retail efficiency." BofA added that AWS is "seemingly poised to accelerate" given the "end of Cloud spending optimization cycle amidst easing comps."

Barclays concurred, writing that AWS is "likely re-accelerating on regular/AI workloads," adding that "retail growth is steady and margins may overshoot the 2018 peak."

"It's finally time to sit back and enjoy the ride," Barclays wrote.

Shares booked a weekly gain of 4.8% gain to $139.57

Apple slumps on iPhone worries

Apple shares (NASDAQ:AAPL) lost 4.8% Friday after the iPhone maker reported its third consecutive quarterly sales drop, even though fiscal third-quarter results topped estimates.

iPhone revenue, which makes up nearly half of Apple's total top line, fell to $39.67 billion from $40.67B a year earlier, missing estimates of $39.91B. And revenue overall totaled $81.8B - better than the $81.73 consensus, but down from $83B a year earlier.

Strength in Apple's services business helped offset the soft iPhone sales: Revenue from Apple News, Apple TV+, and iCloud, among other service units, grew to $21.21B from $19.60B a year earlier, ahead of estimates of $20.76B.

As for its bottom line, earnings per share came to $1.26, also topping estimates for $1.19.

Regarding the iPhone softness, in the earnings call, CFO Luca Maestri said the company expects iPhone and services performance to "accelerate from the June quarter" year over year. He also predicted more double-digit declines in Mac and iPad sales, "particularly on the Mac," due to difficult comparisons vs. the prior year.

In fiscal Q3, iPad revenue fell by 20% to $5.79B year-on-year in Q3. missing Wall Street estimates of $6.41B.

Still, given the expected acceleration in iPhone sales and services, as well as the gross margin expansion, Citi opened a 90-day positive catalyst watch on AAPL stock.

"Post Jun-Q earnings through new Phone launch the stock historically outperformed NASDAQ 5 out 7 times and S&P500 all 7 times, or 8% on average since 2016," Citi wrote in a note.

On the other hand, BofA remains sidelined:

We remain Neutral as positive catalysts of new product introduction and stable iPhones are offset by a potentially weaker consumer spending environment. ...The guidance suggests typical launch timing for iPhones but with the backdrop of a weak US smartphone market we think it’s unlikely that iPhone rev significantly re-accelerates.

Shares ended the week down 7.2% to $181.99.

AMD sees a roller coaster week after Q2

Advanced Micro Devices (NASDAQ:AMD) shares took a slide on its Q2 results amid analyst concerns about guidance, but the stock strongly recovered after Morgan Stanley said the selloff was overdone.

AMD's Q2 EPS came in at $0.58 per share, a penny better than consensus, and Q3 guidance also topped consensus - but Bernstein said it fears estimates "remain too high" amid optimism around AI "and the stock... looks a little stretched to us," according to Reuters.

Oppenheimer was also cautious, writing, "We remain sidelined as AMD’s AI strategy proves out."

Revenue totaled $5.4B, better than the $5.32B analyst expectations, and AMD CEO Lisa Su said the company's AI engagements climbed by more than seven times "as multiple customers initiated or expanded programs supporting future deployments of Instinct accelerators at scale."

The stock more than recovered, ending with a 1.6% gain for the week to $115.82, after Morgan Stanley said it sees the stock as a "significant outperformer" relative to other chip stocks at current levels. The analyst added:

Guidance for flat y/y servers in 3q - up 15-20% q/q - with clear eyes about the current cloud weakness should be an indication that share gains and the delayed Genoa ramp are in good shape. We expected the stock to be up meaningfully.

Citi, for its part, upgraded AMD to Buy from Neutral immediately after the Q2 results, bumping its price target by $16 to $136 per share.

"We thought AMD’s AI products (MI300) would be margin dilutive and investors would eventually care about the expensive valuation on AMD, and we were wrong on both counts," the analysts said.

Qualcomm falls on soft guidance

Qualcomm (NASDAQ:QCOM) fell more than 8% Thursday after the company reported underwhelming guidance for the current quarter and delivered mixed fiscal Q3 results amid softer smartphone demand.

The chipmaker reported adjusted EPS of $1.87 on revenue of $8.44 billion. Analysts polled by Investing.com anticipated EPS of $1.81 on revenue of $8.51B.

For the fiscal fourth quarter, the company guided EPS in the range of $1.80 to $2 - the midpoint of which is below Wall Street estimates for $1.94 - on revenue of between $8.1B to $8.9B, which compares with estimates for $8.77B.

"The midpoint of our fourth quarter fiscal 2023 guidance includes the continued impact of the macroeconomic headwinds, weaker global handset units and channel inventory drawdown," the company said.

Deutsche Bank downgraded the QCOM stock to Hold with a price target lowered by $10 to $120 per share. While the company was in line with the analysts' estimates, it was concerned with management's "soft commentary" around its December quarter and "incremental headwinds in 2024."

CFRA, meanwhile, lifted the price target by $2 to $125 per share on the Hold-rated QCOM stock. The firm wrote:

Although we expect QCOM's under-shipping of true demand is likely to come to an end over the next 3-6 months, we remain wary of QCOM to potentially start losing Apple business by late CY 24.

Qualcomm shares partially recovered on Friday, but ended the week with a 6.4% loss to $121.50.

PayPal plummets on gross profit worries

PayPal (NASDAQ:PYPL) plunged more than 12% Thursday, after edging out Q2 top- and bottom-line estimates, on worries regarding its gross profit growth.

PayPal said it earned $1.16 per share in Q2 on revenue of $7.29 billion. Analysts polled by InvestingPro anticipated EPS of $1.15 on revenue of $7.27B.

But the company's total payment volume (TPV), or transaction revenue less transaction expenses and transaction losses, rose just 1% from the prior year.

After the print, Evercore ISI downgraded the stock to In Line from Outperform, saying it sees "increasing headwinds to revenue and earnings growth" due to "intensifying competition, evidenced by the sequential loss of 2.5 million consumer accounts (0.6% of total accounts) combined with nearly 300 basis point of transaction margin pressure."

The analyst added: "Without a clear path to year-over-year transaction margin expansion, we see limited scope for earnings outperformance."

Bernstein also voiced concerns about TPV growth pressures, adding that gross profit (GP) growth "is essentially the true revenue for the company." The analyst added:

Transaction GP is a critical health metric, especially because TPV growth is an outcome of many businesses with vastly different gross margins. ... On surface, transaction GP growth looks very weak. Are the gross margin pressures structural or transitory?

In terms of guidance, PayPal expects Q3 adjusted EPS to grow 13% to 14%, to a range of $1.22 to $1.24, on 8% revenue growth to about $7.4B. That compared with Wall Street estimates for EPS and revenue of $1.22 and $7.33B, respectively.

For all of 2023, EPS is expected at $4.95, just above expectations of $4.94.

Shares ultimately lost more than 16% for the week to $62.75.

Yasin Ebrahim, Senad Karaahmetovic, and Davit Kirakosyan contributed to this report.

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