Sometimes blowout earnings aren’t enough. For the third quarter in a row, Facebook and Apple generated billions upon billions in profits and flexed the power of their dominant businesses. Despite the impressive showings, the market reacted with a shrug — and perhaps for good reason.
Both technology companies reported strong quarterly earnings late Wednesday that handily beat Wall Street expectations. Facebook posted adjusted earnings per share of US$3.88 compared to the $3.22 estimate, and said sales increased by 33% — much faster than the 22% growth it notched in its prior quarter. Likewise, Apple reported earnings per share of $1.68, compared to the $1.42 consensus, along with a revenue jump of 21% and an all-time high quarterly profit of $28.8-billion. Investors are already looking past these mind-boggling results, though. The reality is that this strong momentum won’t be easy to sustain.
Facebook was upfront, cautioning investors about the full year. In its release, chief financial officer David Wehner said the company faces “significant uncertainty” and expects pressure on its growth rate in the second half of 2021, citing the potential for e-commerce to moderate and the possibility of changes in the regulatory environment. While the company didn’t give much detail on what it sees on the latter front, it isn’t hard to imagine what that may entail.
Following the violent 6 January attack on the US Capitol that was inspired by inflammatory posts on social media, Facebook’s content policies will likely receive more scrutiny. This in turn may prompt the company to increase its spending and hire more moderators to mitigate the spread of misinformation on its platform. And then there is the dual antitrust lawsuits against against Facebook from the Federal Trade Commission and a group of state attorneys-general, which could lead to significant changes its business practices — from prohibiting feature limitations for third-party applications to restricting the company from buying nascent competitors.
Beyond regulatory issues, Facebook faces a direct business threat — TikTok. If the short-video app — owned by Chinese company ByteDance and under fire from former US President Donald Trump — is able to come to an agreement with the Biden administration to address security concerns, it could focus on expanding its US business and possibly eat into Facebook’s share of the Internet advertising market. So far, TikTok with its 100 million American user base, has severely limited the number of ads it shows on its service. But with the prospect of an IPO ahead, TikTok may decide to compete more aggressively for corporate marketing dollars on top of adding e-commerce transaction capabilities for its creators and influencers, pressuring Facebook’s pricing and sales.
Apple’s current business strength may not last much longer either, given that its latest results benefited from circumstances that may not be repeatable. For instance, the one-month release delay from September to October for the latest iPhone line-up could have compressed the typical four months’ worth of pre-holiday demand into a shorter time frame. Also, the wireless carriers were especially aggressive with their iPhone launch promotions and subsidies during the pandemic, which may have pulled forward demand as well. While work-from-home trends have helped boost sales for Apple’s iPad and Mac laptops, this driver will eventually subside when workers eventually return to physical offices. And like Facebook, the tech giant also faces growing regulatory scrutiny around the world, specifically around the high fees it takes from developers for its App Store.
These are all formidable challenges, but the biggest risk to technology sector could be higher taxes. President Joe Biden ran on an agenda to raise the corporate tax rate to 28% from 21%. If such a plan passes the newly Democratic-controlled congress, the seven percentage point decrease in annual after-tax earnings would seriously crimp future profit streams for Facebook and Apple, leading to lower valuations.
With elevated expectations after such a run of blockbuster earnings and heightened risks looming, it’s no surprise investors weren’t more exuberant over this latest report card. While many of us are happy 2020 is over and looking forward to better path ahead, Facebook and Apple face an uphill climb. — By Tae Kim, (c) 2021 Bloomberg LP