As the latest US earnings season draws to a close, here are some of the major themes that stood out to us from the mega cap names.
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Amazon – AI and Cloud boom continues
Artificial Intelligence (AI) continued to dominate headlines across the earnings board.
Amazon may not be as in the limelight as ChatGPT creator, OpenAI, or cloud computing chipmaker, Nvidia, but AI will still be a key part of its offering moving forwards.
Arguably best known for its retailing exploits and next-day delivery, Amazon also has a market-leading position in cloud computing thanks to its Amazon Web Services (AWS) division. It’s the world’s largest cloud computing platform, offering IT infrastructure and services to individuals and businesses. Allowing them to scale up operations quickly and efficiently.
In fact, AWS is the key profit-maker for the group. Despite accounting for only around 16% of the group’s $134.4bn of revenue, it brought in almost 70% of the group’s $7.7bn total operating profit.
With numbers like that, it’s no surprise to see Amazon investing $100m into its AWS Generative AI Innovation Center. This is to help drive progress in things like Stability AI and text-to-image models. It’s a clear sign that Amazon’s confident about the future pipeline of demand in this area, and AWS’ position in the AI and cloud stack looks to be a positive one.
We see early investment in AI as a smart move, and one that’s likely to bring benefits down the line. But of course, there are no guarantees.
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Apple – slowing consumer spending on expensive tech
Another thing that caught our eye was a pullback in consumer spending on expensive gadgets, and even the world’s most valuable company wasn’t immune to this.
Apple saw its third-quarter net sales fall 1.4% to $81.8bn, as consumers put off upgrading to the latest iPhone model. Sales of Macs and iPads were in decline also.
Despite this, the installed base of active devices reached record highs in all geographical regions, showing that while purchases of new iPhones are slowing, consumers aren’t switching over to other brands.
That’s testament to the formidable ecosystem of services that Apple’s built to complement its products. These are all purpose-built to work seamlessly together, keeping users engaged and making Apple an indispensable part of many people’s everyday lives.
Revenue from Apple’s services division rose from $19.6bn to $21.2bn this quarter. And because these are higher margin than product sales, Apple’s operating profit remained broadly flat at $23.0bn, despite the lower total sales.
From here, future spoils will rely on growing higher-margin areas, like services, while creating the next generation of coveted products. We’ve little doubt in Apple’s ability to deliver, but those strengths are well priced in. The valuation sits comfortably ahead of the longer-term average meaning ups and downs are more likely.
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Berkshire Hathaway – riding the interest rate wave
Warren Buffett manages his investments through his holding company, Berkshire Hathaway, and his biggest investment needs no introduction. Apple currently makes up around 46% of Berkshire’s equity portfolio. The rebound in equity valuations this year has helped Berkshire beat expectations this quarter and caused net profit to swing from a $43.6bn loss last year to a $35.9bn profit this year.
But because these figures include unrealised gains and losses from the equity portfolio, they don’t paint the clearest picture of underlying performance. Stripping them out, operating profit rose 6.6% to $10.0bn.
Berkshire owns a variety of other businesses too, including Energy and Railroad companies, as well as a handful of insurance companies which have been a key part of the group’s success story.
In fact, by revenue Berkshire now has the largest insurance operation in the US, growing from $63.0bn to $65.6bn in the second quarter. A strong performance from automobile insurer, GEICO, helped drive total operating profit from insurance up 38.0% to $3.6bn.
These insurance companies are also benefitting from the higher interest rate environment. The collect-now, pay-later model leaves them holding large sums of money, which they can invest in the meantime. With a cash pile of $166bn at the half-year mark and rates having risen on low-risk government debt, the old mantra of “cash is king” has a nice ring to it right now.
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Unless otherwise stated, estimates, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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