While waiting for Q2 earnings results from two of the largest tech companies this week, here’s a premiere on earning reports as viewed through Alphabet and Meta.
Come end of the month, all eyes will once more be on Alphabet and Meta.
This is because the companies that gave us Google and Facebook will be releasing their earnings reports for the second quarter of the year, triggering stock price movements in tandem with their results.
With Q2 earnings reports just days away, here’s a look back at how both tech titans performed in the previous quarter.
Alphabet vs Meta: Q1 earnings report highlights
|Revenue: US$68 billion |
|Revenue: US$27.9 billion |
|Operating income: US$20 billion (+22% y-o-y)||Operating income: US$8.5 billion (-25% y-o-y)|
|Operating margin: 30%||Operating margin: 31%|
|Net income: US$16.4 billion||Net income: US$7.4 billion|
|Earnings per share: US$24.62 (-6% y-o-y)||Earnings per share: US$2.72 (-18% y-o-y)|
Alphabet saw higher increase in revenue
Both companies saw their revenues increase in Q1 2022, but Alphabet’s revenue grew by a much higher degree.
The company reported total revenue of US$68 billion for the quarter, representing a 23% increase over the year prior. Meanwhile, Meta’s quarterly earnings came up to US$27.9 billion, which is a 7% increase year-on-year.
A 7% increase is not a bad result by any means, especially given the mayhem wrought by the pandemic. However, when put side-by-side, Alphabet’s showing is much more impressive, especially in dollar terms.
Meta had a drastic fall in operating income
Operating income refers to the earnings of a company after deducting operating expenses, such as wages, or cost of goods sold. It represents the profits a company makes from its ongoing operations.
In this metric, we see some troubling signs for Meta. The company formerly known as Facebook saw a significant fall in operating income of 25%, compared to the year earlier.
This is thought to be attributed to Apple’s recent privacy clampdown, as well as a 28% increase in headcount year-on-year.
On the other hand, Google’s parent company saw an increase in operating income of about 22%, which inspires a greater degree of confidence.
Although Meta’s operating income plunged for the quarter, it nevertheless managed to maintain an operating margin of 31%, which means the company is still highly profitable, as befits its status as one of the most established companies in the world.
In a similar vein, Alphabet’s operating margin for the quarter remained unchanged at 30% from the year prior.
As operating margin determines — among other things — the dividends available to investors, it is an important metric to note.
Alphabet had better profitability
Lastly, let’s take a look at perhaps the most important metric of all — earnings per share, or EPS.
Earnings per share is a ratio measuring how much profits a company makes per share of stock. It offers a universal measure to compare different companies competing in the same sector, or offering the same goods and services.
Importantly, EPS indicates the profitability of a company, and therefore, how valuable the stock is to investors. The higher the EPS, the more profits the company has to develop the business and increase shareholder value, or to pay out higher dividends to shareholders.
It’s no exaggeration to say that EPS is among the most important metric investors should track.
So how did our tech giants do for Q1 2022?
Alphabet and Meta both saw reductions in EPS — at 6% and 18% respectively. The significant decline in profitability shown by Meta is especially worrisome when compared to Alphabet’s more moderate dip. Both companies have arguably similar revenue models – selling online ad space — and this set of results tells us that current market conditions are weighing more on Meta than Alphabet.
And let’s not forget that on a share-by-share basis, Alphabet’s EPS of US$24.62 makes the stock around 12 times more valuable than Meta (US$2.72).
Is Alphabet a better stock than Meta?
Judging by the Q1 earnings report alone, it might seem that Alphabet is a better stock to buy than Meta. However, earnings reports, although important, don’t tell the full story.
For instance, we can’t ignore that the entire tech sector has been taking a beating, which makes Meta’s weaker Q1 performance less significant.
Also, things could very well turn out differently when the next earnings report comes along, which is due on 27 July, after the markets close.
For instance, analysts expect Alphabet’s revenue growth to slow in Q2, reaching just 13% compared to the 62% increase seen in the year prior. This may seem like a negative result, until you remember that Q2 2020 saw revenue fall by 2% due to the pandemic.
As for Meta, the company has set a revenue forecast of between US$28 billion and US$30 billion for the second quarter of the year, which is slightly lower than Wall Street’s estimate of US$30.7 billion.
If the company manages to match — or better yet, beat — this forecast, its share price is likely to see an increase.
The key takeaway here is this: Earnings reports are no doubt helpful, but they shouldn’t be the only yardstick by which you make your investment decisions.
It is common for stock prices to go up or down if companies beat or miss forecasts, but that doesn't automatically mean you should buy or sell a stock based on any one earnings report alone. It also doesn't make one stock better than the other.
Instead, earnings reports are best used as a time-saving tool to keep tabs on how companies are doing, as part of your due diligence as you continue to make measured, educated moves in building your investment portfolio.
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