For years, investors in technology giants like Alphabet (GOOGL) and Amazon (AMZN) focused in large part on those companies’ topline revenue increases. These were, after all, the biggest growth stocks. This earnings season has made clear the market is now intently focused on costs and expenses. The reason is that sales growth has become harder to come by, and many on Wall Street fear it will stay that way in the near future as the global economy slows and possibly tips into recession. Higher interest rates haven’t helped investor sentiment either. In this type of environment, controlling spending can help protect earnings. We want to see that happen with the Club’s holdings, so we paid close attention to what management teams at our Big Tech stocks signaled on costs during this mixed earnings season. For the most part, we were left wanting a bit more. Here’s a company-by-company breakdown. Microsoft (MSFT) reported fiscal 2023 first-quarter results after the bell Tuesday. While the quarterly numbers topped estimates, guidance was weaker than analysts predicted. The stock fell more than 9% combined over the next two trading days, before jumping 4% in Friday’s session. Shares fell more than 1% Monday. CFO Amy Hood said operating expenses increased by 18% year-over-year on a constant currency basis in the quarter ended Sept. 30. Head count grew by 22% on an annual basis, 6 percentage points of which was due to acquisitions that closed in the previous two quarters. The primary driver behind both increases was “investments in cloud engineering, LinkedIn, Nuance and commercial sales,” Hood said. Nuance is an artificial intelligence company that Microsoft acquired in March. In its guidance for its fiscal second, Microsoft expects operating expenses to grow between 17% and 18% year-over-year — suggesting its operating expense growth rate should be relatively stable compared with Q1. “You should expect to see our operating expense grow moderately materially throughout the year,” Hood added. Management does, however, expect a quarter-over-quarter increase in capital expenditures related to the build out of its cloud infrastructure. “Our sequential head count growth from Q1 to Q2 will be minimal. … We’ve added a lot of head count over the past 12 months, and we want to make sure we use those head count in the most productive way possible, Hood said this week. Hood’s comments on the earnings call came about a week after Microsoft confirmed reports that it had cut some jobs. In July, around the start of its new fiscal year, Microsoft also fired a small percentage of its workforce. Microsoft employed roughly 221,000 full-time employees as of June 30. Alphabet reported weak third-quarter numbers after Tuesday’s market close, and the stock dropped more than 11% in the two sessions following the release. It was up over 4% Friday in an overall positive market, but down around 2% Monday. Chief Executive Sundar Pichai said the tech giant was focused on “moderating expense growth” in the coming quarters. Those comments on Tuesday come on the heels of a 26% year-over-year increase in operating expenses in the third quarter. The parent company of Google’s growth in head count was a key driver behind the rise in operating expenses: 12,765 people were hired in Q3, although more than 2,600 came on board through the acquisition of cybersecurity firm Mandiant. On Tuesday, CFO Ruth Porat said new headcount in the fourth quarter “will slow to less than half the number added in Q3.” With respect to Alphabet’s capital expenditures, Porat said the company intends to keep making “significant investments in technical infrastructure with servers as the largest component.” Alphabet’s capital expenditures (CapEx) rose 6.7% year-over-year, to $7.28 billion in the third quarter. While Alphabet’s third-quarter spending disappointed many on Wall Street, Pichai said the company is still actively monitoring expenses and employee productivity. “We are reviewing projects at all scales pretty granularly to make sure we have the right plans there and, based on that, the right resourcing and [are] making course corrections,” she said. Meta Platforms (META) announced dismal guidance Wednesday along with mixed third-quarter results. The company’s outlook — both on current-quarter revenues and 2023 expenses — disappointed investors, sending the stock tumbling by roughly 25% on Thursday. While the stock rose slightly Friday, it was down about 5% Monday. The Instagram and Facebook parent projected total expenses in 2023 to be between $96 billion and $101 billion, compared with a range of $85 billion to $87 billion in 2022. At the company’s experimental metaverse division, expenses are expected to “increase meaningfully again in 2023,” CEO Mark Zuckerberg said Wednesday. Meanwhile, CFO David Wehner said the company expects head count at the end of next year to be “approximately in line” with third-quarter levels. Meta had 87,314 employees as of Sept. 30, up 28% year-on-year and up 4.5% compared with the end of the second quarter. “We are holding some teams flat in terms of head count, shrinking others, and investing head count growth only in our highest priorities,” Wehner said. In the third quarter, Meta’s capital expenditures totaled $9.52 billion — up from $7.75 billion in the second quarter — and contributed to the company’s sharp drop in free cash flow, at just $173 million. The company’s CapEx guidance for next year is in a range of $34 billion to $39 billion, more than the $29.65 billion analysts expected. Management said almost all of those expenditures are related to expanding artificial intelligence capabilities. “If our bets are correct, then the AI CapEx that we’re bringing online should be able to drive incremental engagement that’s pretty meaningful there,” Zuckerberg said. “But we think qualitatively that that investment makes just a lot of sense given the direction that the world seems to be going in.” Amazon reported rough quarterly numbers and forward guidance Thursday night. While shares fell nearly 7% Friday, the stock had been down around 13% in extended trading Thursday. On Monday, the stock was down about 1.4% to roughly $102 per share. Amazon management has been talking since the spring about improving the cost structure in its ecommerce business after Covid-fueled overexpansion. CFO Brian Olsavsky said Thursday there’s still more work to be done, even after generating “over $1 billion in operations-cost improvements” in the third quarter. “This represents a solid improvement in productivity quarter-over-quarter although not quite as much as we had planned,” he said. Amazon ended the third quarter with 1.544 million employees, up 5% compared with the same period a year ago. However, that’s below the 1.622 million workers Amazon had as of March 31. “As we’ve done it similar times in our history, we’re also taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere,” Olsavsky added. Olsavsky said capital investments for 2022 are expected to be around $60 billion – roughly matching last year’s levels. Capital investments in fulfillment and transportation were cut by roughly $10 billion compared to last year, part of Amazon’s ecommerce business rationalization. On the other hand, investments in tech infrastructure to support Amazon Web Services, the company’s highly profitable cloud computing division, increased by about $10 billion. Apple (AAPL) reported better-than-expected results Thursday night, and management’s commentary on current-quarter revenue growth roughly conforms with expectations. Apple’s stock closed up more than 7% Friday, at $155.74 a share. It was giving back some of those gains Monday, down nearly 2%. Chief Executive Tim Cook told CNBC Thursday that the iPhone maker has “slowed the pace of hiring” due to economic uncertainty. “We are hiring deliberately,” he said. Meanwhile, CFO Luca Maestri said the company expects capital expenditures to remain on trend in the coming quarters. “We’ve been fairly stable and I think our capital intensity is really very good. We have three major buckets in CapEx for the company,” he explained. “We have certain dedicated tools for the manufacturing facilities; we have some spend around data centers; and we have spend around our office facilities around the world. We, obviously, monitor all of them. There is nothing unusual that we see for the next 12 months.” Bottom line Our slate of tech earnings last week was largely disappointing, as many of the management teams do not seem to have caught up to the market’s expectations around costs in this uncertain economic moment. The lone exception across Big Tech was Apple, which demonstrated why we’ve long said it’s a position to hold for the long haul, not a stock to constantly trade. In response, we adjusted our price targets on the tech stocks following the earnings reports. While these are far from an end-all, be-all investment guide, they do help contextualize our outlook on a given stock. Our decision to lower them for each company largely reflects lowered estimates for future quarters as growth slows and lowered valuations across the tech sector. This includes Apple, despite the fact we liked its quarter. We also downgraded shares of Meta Platforms to a 2 rating; the company’s aggressive spending outlook required us to adopt this more cautious view. (Jim Cramer’s Charitable Trust is long AAPL, AMZN, META, MSFT and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a deliver Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The logos of Google, Apple, Facebook, Amazon and Microsoft displayed on a mobile phone and a laptop screen.
Justin Tallis | AFP via Getty Images
For years, investors in technology giants like Alphabet (GOOGL) and Amazon (AMZN) focused in large part on those companies’ topline revenue increases. These were, after all, the biggest growth stocks
.