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Earnings season is upon us. In this week’s article, we want to discuss Facebook’s, Amazon’s, Microsoft’s and Google’s earnings. One common theme from this article is that these companies performed very strongly through the pandemic, beating analysts’ expectations and breaking their own previous records (we used the word record 7 times and the word strong 7 times – running out of superlatives).

There is a lot to cover – so let’s get to it.

Facebook’s strong Q3 and Cloud gaming

Facebook’s strong Q3

Despite the boycott earlier this summer, the company beat analysts’ earnings estimates. 

  • It reported that, in Q3, revenue went up 22% to US $21.5 billion, with net income increasing 30% to US $7.8 billion. 
  • Facebook’s user base also went up. The number of people that use Facebook’s products (Instagram, Messenger and WhatsApp) each month increased to 3.21 billion from 2.82 billion people a year ago, or up 14%.
  • Facebook expects Q4 2020 to be even stronger – as the companies spend more on ads during the holiday season. 

The revenue growth is largely driven by an increase in Average Revenue per User (ARPU – which is how much money Facebook makes per user). After a deceleration in Q2 2020 (due to the pandemic), ARPU growth has begun its rapid  acceleration in Q3 2020 (Figure 1).

Figure 1: Facebook’s Average Revenue per User year-over-year growth rate, by geographical regions.

Facebook’s competitor, Snapchat, also released its earnings recently. Like Facebook, it also beat expectations.  To contrast the difference in scale between the two social media companies, see Figure 2. Facebook is not only much larger, but also much more profitable. The ARPU for Facebook for its most profitable market (US & Canada) is 7.2x higher than that of Snapchat’s.

Figure 2: Facebook makes more than 7.2x more revenue per user than Snapchat in US and Canada.

Facebook’s cloud gaming

Facebook is the latest tech giant to enter the cloud gaming space. For Facebook, app install ads for gaming is big business. With its cloud gaming, the company intends to expand its gaming ad revenue opportunity. 

Unlike Microsoft’s or Amazon’s game streaming strategies where they are trying to create streaming channels that gamers can subscribe to (for a monthly fee), Facebook is leveraging cloud gaming to let users try games for free. Facebook’s cloud gaming will enable users to try a game without leaving the Facebook page and without having to install the game. In other words, the aim is to reduce friction to amplify Facebook’s gaming advertisement revenue. 

Figure 3: Facebook’s user’s journey when engaging with a gaming ad – (1) current gaming ad vs. (2) cloud gaming ad.

Facebook’s cloud gaming will enable cloud playable ads. From Facebook’s blog announcement:

“Demos are some of the most effective gaming ads out there. Building on our HTML5 playable ads format, we’re launching cloud playable ads. With this new format, we can now support interactive demos from a game’s native code, blurring the line between games and ads.

For developers, creation of cloud playable ads takes less time and is less expensive, and allows for more options. Multiple pieces of creative can run from a single APK. Developers can customize the experience by swapping out different levels, characters, and more. Players get a better sense of games before they commit precious money, download time, or storage space.”

Apple’s Earnings – delayed iPhone launch hurts the bottom line

Apple announced a record September quarterly revenue of US $64.7 billion (a 5.5% increase when compared to the same period last year). 

Here are three key takeaways: 

  • iPhone revenue declined 21% year-over-year because of delays in launching the new 5G iPhones (see Figure 4). Most of this revenue is pushed to December 2020 – so Apple is hoping that the holiday season will be strong.
  • Continued work-from-home trends increased sales of Mac computers.
  • As a result of the delayed launch, revenue in Greater China fell 29%, to the lowest level in five years.
Figure 4: Apple’s quarterly revenue by product line

Amazon’s Earnings – another record quarter

In what appears to be a trend for the tech giants – Amazon also recorded record earnings. Q3 revenue and profits topped its previous record (Q2 2020). In Q3, Amazon reported revenue of US $96.2 billion, up 37% compared with the same period from last year. 

Here are three key takeaways: 

  • Almost all its business segment posted double digit growth rates. AWS – the cloud computing segment, saw a 29% increase in revenue to US $11.6 billion. An astonishing accomplishment considering Amazon is the largest cloud computing provider (at about 31% market share). 
  • More people are flocking to Amazon to shop and to sign up for Prime. This means more consumers the company can show ads to. As a result, the ad business saw a 51% revenue increase from last year to US $5.4 billion (more than half of US households shop or search with Amazon – not Google)
  • Profits nearly tripled to US $6.3 billion.

Microsoft’s strong quarter

Another tech giant beating expectations is Microsoft. The company posted quarterly revenue of US $37.2 billion (12% increase), with a net profit of US $13.9 billion in this most recent quarter.

Big numbers, and here are three key takeaways:

  • Microsoft’s Azure, its cloud computing business, jumped 48% year-over-year. Azure has the second largest market share (second to Amazon, at about 20%)
  • The increased adoption of work-from-home also increased Microsoft’s Teams’ usage. Teams is Microsoft’s version of an all-in-one communication tool, competing with Slack and Zoom. Teams now have 115 million daily active users, up from 75 million daily active users disclosed in April (a much larger number compared to Slack). 

Google’s (Alphabet)

Advertisers restarted their ad spend, boosting Google’s revenue. Digital advertising segment raked in a total of US $37.1 billion in revenue, beating expectations.

Google’s business saw similar trends as the other tech giants:

  • Advertising drove revenue. Google search generated US $26 billion, while YouTube raked in more than $5 billion (a first, which is a gain of 32% over the same period a year earlier). See Figure 6 for Google’s revenue trend.
  • Along with the other cloud providers, Google’s Cloud also grew rapidly. Revenue grew 44%, exceeding US $3 billion for the quarter (still 4x smaller than Amazon’s though).
Figure 5: Google’s quarterly revenue. Data is from the company

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms.  Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

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