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Big Tech leans on cloud, services amid war-related, economic uncertainties

Solid performance from cloud providers, in particular, is set to drive Big Tech earnings higher this year, despite some mixed first-quarter results that rattled investors in April.

Russia's war in Ukraine exasperated pandemic-stressed supply chains, but analysts pointed to solid underlying performance at Microsoft Corp., Alphabet Inc. and even Amazon.com Inc., which reported its first quarterly loss in seven years. Social media companies Meta Platforms Inc., Twitter Inc.. and Snap Inc. all reported user growth, though the war in Europe took a toll on some advertising revenues. Meanwhile, Elon Musk's bid to takeover Twitter added to uncertainty about the direction of the social media business.

"What I think investors should be thinking of when they're looking at tech companies is companies that derive the majority of their revenue from technology," said Nancy Tengler, CEO and CIO of Laffer Tengler Investments.

Most Big Tech companies posted double-digit stock losses in April after reporting earnings, with the exception of Twitter, whose shares soared after Musk announced he had reached a deal with the company's board.

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Big Tech cloud, services demand offsets economic disruptions

Microsoft reported an 18% year-over-year growth in revenue, to $49.4 billion, largely due to the growth of its cloud services.

"Certainly on the corporate side, what we saw with Microsoft's cloud service is that work from home environments are very profitable for companies like Microsoft," said Ross Gerber, CEO and founder of Gerber Kawasaki Wealth and Investment Management.

Revenue grew even faster for Microsoft's main cloud competitors. Alphabet's Google Cloud, which trails both Microsoft and Amazon's AWS in market share, reported 44% year-over-year growth, to revenue of $5.82 billion. AWS reported revenue growth of about 37%, to $18.44 billion.

Weighing on Amazon's consolidated results were supply chain challenges and a $7.6 billion loss on its investment in electric vehicle company Rivian Automotive Inc. Shares of Amazon tumbled 33% overnight after its April 28 earnings report.

Still, analysts predict Amazon will recover quickly given the strength of its market-leading cloud unit.

"AWS, Azure, and GCP are rock solid," said Robert Cantwell, founder and portfolio manager of Upholdings and Compound Kings ETF, a private equity fund. "Those three units are chugging along, without much volatility, which is a very positive thing to see that in spite of how volatile consumer wallets have been."

Bank of America analysts Justin Post and Michael McGovern gave Amazon a "Buy" rating after the earnings report but lowered their price target on its stock to $3,770 from $4,225, noting new cost challenges for its e-commerce business related to the Russia-Ukraine war.

Meanwhile, Apple drew praise for how it navigated the global supply chain crisis.

In an April 28 earnings call, Apple CEO Tim Cook said nearly all of the company's Chinese assembly plants in Shanghai have restarted. Apple expects COVID-19 disruptions and supply constraints to cost it between $4 billion and $8 billion in the current reporting period.

Demand for the new iPhone 13 helped to drive Apple's revenue to $97.23 billion, up 9% year over year. That included $50.57 billion from iPhone sales, which grew 5% year over year.

Sales of Apple Macs and wearables also grew by double-digit percentages but remained far below iPhone sale totals. Apple brought in $10.44 billion from Macs and $8.81 billion in wearables during the March quarter, representing gains of 14.7% and 19%, respectively. Sales of iPads slipped 2% year over year, to $7.65 billion.

"They [Apple] continue to surprise to the upside," said Nancy Tengler of Laffer Tengler Investments. "They're also signaling their optimism by adding in a dividend increase."

Outside of hardware, Apple's services revenue gained 17% year over year, to $19.82 billion.

Wedbush analysts Dan Ives and John Katsingris maintained a bullish view of Apple, praising its ability to navigate around chip shortage issues. They assigned Apple a price target of $200 and an "outperform" rating.

Meta returns to user growth, Twitter takeover adds uncertainty

Meta's Facebook platform reported a return to sequential user growth after a slowdown at the end of 2021, when it lost a million daily active users from its namesake platform.

Facebook added about 3 million global users in the first quarter of this year, with European losses related to the war in Ukraine offset by gains in the rest of the world. Shares of Meta jumped 16% at the opening bell after reporting earnings April 28.

Setting aside the impact of its pullback from Russia, Facebook's earnings signal the company is successfully competing with short-form video platform TikTok for engagement with its Instagram LLC Reels product, said Loup Ventures managing partner Gene Munster.

Meta executives said Reels monetization is not expected right away, though Munster predicts the product will start contributing to revenue in the fourth quarter of this year.

"They're really pushing people to use [Reels] and it's working," the analyst said.

Meta reported $27.91 billion in total revenue, up 7% year over year.

Jefferies analysts Brent Thill and James Heaney in a post-earnings note assigned Meta a "Buy" rating with a price target of $330.

As for Twitter, the microblogging platform generated $1.2 billion in overall revenue for the first quarter, up 16% year over year. The platform also grew its monetizable daily active user base, or mDAUs, by 16%, up 229 million.

However, the company's pending takeover by billionaire Elon Musk is likely to lead to major changes, casting some uncertainty over its future. Twitter canceled its earnings call and declined to issue guidance given its pending acquisition.

"While Musk isn't hyper-focused on the company as a profit and revenue machine — at least in the way he's articulated that — you can be sure he's going to run it the way he likes to run companies, which is a much different type of discipline," said Daniel Newman, Futurum Research principal analyst and founding partner.

Snapchat parent Snap Inc. reported a revenue miss in the first quarter, attributable mainly due to advertisers pausing campaigns amid the Russia-Ukraine conflict, as well as Apple Inc. app privacy changes that rolled out last year. Snap made about $1.06 billion in revenue, versus the S&P Capital IQ consensus estimate of $1.07 billion.

Snapchat daily active users grew by about 4% sequentially, to 332 million from 319 million.

"In terms of actual performances and their ability to take it on the chin and keep moving forward, I think you do see very consistent progress from the company," said Mark Shmulik, AB Bernstein's senior internet analyst.

But competing with Meta's Instagram is daunting task, said Upholdings' Cantwell. "[Snap] is going to have a hard time fighting at its scale and size," the portfolio manager said. "I think they're just potentially a little bit stuck as a small market share player."