• The market expected AAPL to earn 71 cents per share

• Consensus estimates were for $7.41 earnings from AMZN

• $1.91 per share was the number for FB

 

• So many issues facing markets and the technology leaders in the coming months

• Would the parts be worth more or less than the wholes if the government mandates breakups?

Technology stocks have been huge winners since the stock market reached the risk-off lows in March. Technology has made it easier to deal with the worst pandemic since the 1918 Spanish flu. Working from home has become possible because of the technology provided by Zoom (ZM), and it has eliminated the need for travel.

Communications via Apple (APPL) have not only allowed people to remain in contact, but facetime makes it possible to see business associates, friends, and family. Amazon’s (AMZN) business exploded as people can shop from home for products the company delivers to their doorsteps. Social media platforms like Facebook (FB) have experienced dramatic growth during the pandemic.

APPL, AMZN, and FB have a combined market cap of over $4.1 trillion. On October 29, all three announced their results for the third quarter of 2020 in an earnings bonanza for the leading technology companies. As Halloween was last Saturday, the companies delivered a bag full of treats and few tricks for the holiday.

Time will tell if 2020 will be a year when these companies see their earnings power peak as Washington DC could put roadblocks in place for the coming years. The price action in the shares following the latest earnings report reflects the current risk-off environment because of Tuesday’s election and the second wave of the coronavirus pandemic.

The market expected AAPL to earn 71 cents per share

According to Yahoo Finance, the market expects AAPL to deliver EPS of 71 cents per share in the third quarter of 2020. The number came in at 73 cents. Apple posted $64.7 billion in revenue companies to projections of $63.7 billion. Despite the beat, AAPL shares slid with the stock market as investors saw worse than expected iPhone revenues.

Source: Barchart

As the chart highlights, after reaching a peak of $137.98 on September 2, the stock was at the $108.86 level on the final day of trading in October, a decline of 21.1% from the high. The stock fell in the aftermath of earnings last week. AAPL is a dominant technology company that is likely to be in the crosshairs of politicians in Washington DC, and Europe in 2021.

Consensus estimates were for $7.41 earnings from AMZN

Analysts on Yahoo Finance expected AMZN to report EPS of $7.41 on October 29. Net sales in the third quarter increased by 37% on a year-on-year basis to $96.1 billion, with operating income rising 96% over the same period to $6.2 billion. Earnings of $12.37 per share blew away the consensus estimates for the quarter.

While the earnings were strong, AMZN shares fell following Thursday’s report.

Source: Barchart

The chart illustrates the all-time peak in AMZN shares came on September 2 at $3,662.25. On Friday, the stock closed at the $3036.15 level, 17.1% below its high. Analysts are concerned that escalating costs for expanding AMZN’s delivery infrastructure and investments in jobs and employees necessary to address the surge in online shopping could weigh on future earnings. However, AMZN reported a third-quarter that displayed the company’s earnings power that dominates the online commerce sector.

$1.91 per share was the number for FB

Facebook rounded out the big third quarter for technology companies as it reported EPS of $2.71, eighty cents above the projections. Revenues of $21.47 billion were higher than expected. Revenue per user in Asia-Pacific, Europe, the US, and Canada posted double-digit percentage gains.

Third-quarter advertising revenues were better than the market had projected as they were 9.8% higher on a year-over-year basis. Monthly active users in Q3 were 2.74 billion, up almost 12% from the same time in 2019, with daily active users 15.5% higher.

Meanwhile, total costs and expenses were 28.3% higher. The company warned that it expects daily and monthly active users to be flat or slightly lower in Q4.

Source: Barchart

After trading at a high of $304.67 on August 26, the shares were trading at the $263.11 level at the end of October, a decline of 13.6%. The stock moved lower after the latest earnings report.

So many issues facing markets and the technology leaders in the coming months

APPL, AMZN, and FB reported impressive results in the third quarter. However, the leading technology companies face a host of issues in the coming months. A blue wave on November 3 would significantly increase corporate taxes, which will weigh on earnings.

The three companies’ dominant position and their massive cash hordes will be in the crosshairs of regulators and policymakers in the US and Europe in 2021 regarding antitrust and anti-competitive practices. Moreover, the companies’ size and reach put them in a position where they control and use data to their benefit.

The three companies’ market caps have grown to levels where governments may insist on breakups into smaller operating businesses to foster competition and limit the monopolies when it comes to data.

Would the parts be worth more or less than the wholes if the government mandates breakups?

The technology sector exploded during the global pandemic. Working and learning from home and social distancing fostered a substantial increase in the dependence on technology for communications, shopping, entertainment, and many other requirements for daily life in the US and worldwide.

The third-quarter earnings reflect the exponential growth and power of the sector. AAPL, AMZN, and FB are three leading companies that face the growing bipartisan opinion that they have grown into oligopolies. Breaking them up into smaller operating companies could wind up a political solution. Time will tell if the sum of the parts after a breakup would be more or less valuable than the whole.

On the one hand, limiting data would weigh on value. On the other, investors’ hunger to own technology shares could create a rush to buy smaller companies at lower share prices. An initial rush to buy could increase the wealth of founders like Jeff Bezos, the world’s wealthiest person, and Facebook’s Mark Zuckerberg. Tax increases could address those concerns with far higher individual rates for billionaires.

In markets, the best performing sector over one period often becomes the worst in a subsequent period. While the election will determine corporate and individual tax rates, political pressure on the technology sector seems certain to increase in 2021. The melt-up in technology stocks from March 2020 through late August and early September 2020 could turn into a meltdown over the coming months.

Objectively, the earnings power of the technology leaders is impressive and is likely to continue if the economy improves. GDP in the US grew by 33.1% in Q3, which supports the latest earnings reports. However, the second wave of coronavirus is likely to make that growth level an outlier in the coming two quarters.

Technology companies demonstrated that the pandemic strengthened their earnings power. The virus will likely take the politician’s eyes off the leading companies as the second wave rages. The larger these companies grow, the more likely a day of reckoning is coming in 2021.

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AAPL shares were trading at $109.96 per share on Monday morning, up $1.10 (+1.01%). Year-to-date, AAPL has gained 50.61%, versus a 4.61% rise in the benchmark S&P 500 index during the same period.

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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