Opinion: $1.4 trillion? Big Tech’s pandemic year produces stunning financial results
Big tech headed into 2021 with more than nine months of pandemic experience, but was still surprised by the scale of supply chain disruptions, labor shortages and rising prices .
Despite these challenges, their financial performance has been stunning: Google parent Alphabet Inc. GOOGL,
Amazon.com Inc. AMZN,
Facebook parent Meta Platforms Inc. FB,
and Microsoft Corp. MSFT,
individually and collectively, post record profits and revenues all around in 2021.
Collectively, the companies topped $1.4 trillion in revenue — which would rank 13th in gross domestic product as a nation, just behind Brazil and ahead of Australia, according to World Bank figures — and they generated $320 billion in profits based on generally accepted accounting principles (GAAP).
For some context on this profit figure: Apple, the most valuable company in US history thanks to a series of incredible profits, took 37 years as a public company – from 1980 to 2017 – to collect as many profits in total. Still, the iPhone maker contributed the bulk of the tech sector’s profits in 2021, topping $100 billion for the first time, a figure that itself eclipses the total profit Apple has collected over the past year. its first three decades in the market.
Don’t get me wrong, this is not normal. These five companies accounted for 17.8% of earnings of S&P 500 index companies in the first nine months of the year, according to Dow Jones Market Data, and increased their profits by more than 55% compared to already record profits in 2020. Individually, some companies saw breathtaking growth in profits last year. Alphabet, for example, made as much profit in 2021, $76 billion, as it did in 2020 and 2019 combined – and those two years contained record profits for the search giant at the time.
One way to see how irrelevant this was from a historical perspective is to look at company net margins – only Facebook saw net margins decline in 2021 from the prior year, one of the reasons why its stock was hammered after reporting fourth-quarter results last week, including the largest one-day market cap decline in history. Apple and Alphabet saw huge spikes in net margins in 2021, while Microsoft enjoyed its biggest net margins since the dot-com boom collapsed in 2001 and Amazon posted its biggest margin since 2004 .
These gains should have an outsized effect on the S&P 500 SPX Index,
as index companies collectively head for the highest net profit margin ever. In total, with nine months of reported results and a combination of reported fourth quarter results and analyst estimates, companies in the S&P 500 index are expected to produce a net profit margin in 2021 of 12.21%. That would blow previous numbers, which were largely in the single digits and previously hit 10.75%, according to Dow Jones Market Data.
Which sector of the S&P 500 has the largest profit margin? The information technology sector, which is expected to grow from margins of around 19.5% in each of the past two years to 23.27% in 2021 and have the largest margin of all 11 S&P 500 sectors Apple and Microsoft reside in this sector, while Facebook and Google are expected to increase margins in the communication services sector from 12.22% in 2020 to 16.08% in 2021.
While Big Tech’s 27% annual sales growth is half the percentage of sales growth, it’s still nothing to sneeze at, if anyone even thought to sneeze at $1.4 trillion in annual revenue. . Three of the five companies alone made more than a quarter of a trillion dollars in sales in 2021, and Amazon hit nearly half a trillion, with $469.82 billion. That’s more than Facebook’s total sales in its entire history.
But what about 2022?
While the financial performance of 2021 (and 2020 and 2019) has been terrific for Big Tech, the only thing Wall Street wants to know is whether it will continue. And there are some interesting questions about that, even as the bulls continue to insist that there are only gains ahead.
“The rugged impressions of tech titans Amazon, Apple, Alphabet, Microsoft, AMD AMD,
and Qualcomm QCOM,
are beginning to paint a clear growth story for the tech space in 2022 which we believe is very important for the street going forward,” Wedbush Securities analyst Dan Ives wrote in a note to clients on Friday.
But 2021 may see a growth spurt for Big Tech. At present, analysts expect Facebook and Amazon to see declining earnings this year, and growth rates are expected to slow significantly across the board.
The outlook for the first quarter, as expected, was relatively weak, especially for Facebook, which lost a record $232 billion market cap on Thursday after warning of a range of “headwinds” including competition. from TikTok, the impact of Apple’s privacy changes on its ad revenue, and the overall macroeconomic constraints on ad spend.
Read also: Meta CFO cries wolf again with gloomy outlook
Only one of the big tech companies, Microsoft, provided a strong outlook for the first calendar quarter, and none of the companies provided a full annual outlook for 2022, as many doubts remain about the effects of the current inflation storm. , supply chain disruptions , and labor shortages.
Apple gave a fuzzy forecast that didn’t include any numbers, saying its first calendar quarter of 2022 would see “solid growth” year-over-year. Analysts expect Apple to post revenue of about $93.6 billion in its fiscal second quarter, ending in March, for about 5% year-over-year growth. on the other.
Read more: Apple reports parade of sales records as profits top $30 billion for first time
While Facebook struggled with changes to Apple’s iOS platform that allowed iPhone users to be untracked by advertisers, Google was able to circumvent these issues. Alphabet also rallied after the company announced a major 20-to-1 stock split, which will reduce its share price for retail investors and potentially make its stock a DJIA Dow Jones Industrial Average.
No more Thérèse: Google finally divides its shares; Will Amazon and a Dow invite be next?
Alphabet’s YouTube business, however, has disappointed some analysts slightly, who also see it as increased competition from TikTok. And Google executives have avoided any kind of forecast in their earnings reports and conference calls.
Other companies signal the end of the pandemic work-from-home boom in tech sales, after big shortfalls from Netflix Inc. NFLX,
and Peloton Interactive Inc. PTON,
Life is slowly returning to normal as in-person businesses have reopened, such as movie theaters and gyms, and as the Omicron wave of coronavirus dies down and spring arrives, it’s likely we’ll see more people leave. the digital life they relied on. the past two years for the physical world around them.
Nobody knows what’s on the other side of the pandemic whose effects have obviously driven consumers and businesses to online services, cloud software and updated hardware, but there’s no way to know with certainty that these gains will continue. It is equally logical to assume that the huge gains of the last two years have been carried over into the years to come, which would then be potentially darker than currently expected. And regulators, who were already circling companies after seeing their power, money and influence grow in recent years, are sure to keep the pressure on.
Ives said that while he thinks tech valuation multiples will continue to compress as the Federal Reserve raises interest rates this year, he thinks Wall Street is currently underestimating potential growth. But after the growth we’ve just seen, it’s hard to believe the recall will top it, especially with antitrust concerns piling up. Then again, Big Tech is already doing things that seem impossible, so maybe they can keep defying the odds.