If you’re invested, no need to panic as the dividends and long-term prospects continue to look quite solid. Check out my latest thoughts on “Canada’s top dividend stocks” for a look at how the railways compare to other dividend favorites. Be sure to read MoneySense’s list for “Best dividend stocks for 2022”, by Mark Brown, too.
The tide is going out on American tech stocks—what did recent earnings reveal?
As interest rates climb, companies that had been taking on large amounts of debt to generate breakneck growth rates are coming under more scrutiny. This includes many of the big tech names. As the market has responded to recent earnings news, what we’re seeing is a real compression of the P/E ratio for several companies. While stocks such as Netflix (NFLX) are still making a substantial amount of money, the profit forecast is not nearly as rosy as it once was. Consequently, investors are not willing to pay such lofty prices to purchase those future earnings streams.
Earnings reports for Q1
Here’s a quick look at how big tech has performed in the wake of recent earnings reports:
Alphabet (GOOG): Narrowly missed estimates chiefly due to YouTube revenues coming in lower than expected. Overall, there isn’t much movement up or down as the company continued to show real confidence in future prospects by announcing US$70 billion in stock buybacks. (All figures below are in U.S. dollars.)
Apple (APPL): Apple continues to meet expectations as its revenues rose 8.6%, year over year, with all major product lines showing strength. The services segment of Apple has been a real area of growth for the company. It announced a small dividend raise and a $90 billion commitment to stock buybacks, thus rewarding shareholders who pay a substantial P/E premium for the high-quality company.
Microsoft (MSFT): Microsoft had perhaps the strongest showing in the first quarter of 2022, as profits rose 18%, led by its Azure cloud computing growth, and significant gains by its LinkedIn and Xbox segments. Investors continue to expect big things from this company as its P/E ratio hangs around 30.
Meta (FB): Shares of the much-maligned social media giant (formerly known as Facebook) shot up after earnings per share came in significantly higher than expected. Interestingly, this increased profitability was more a result of efficient cost cutting than increased revenues. The company appears to have reassured investors it will churn out profits for the foreseeable future—even if it won’t grow quite as fast as in years past. At a P/E of between 14 and 15, Meta is even showing up on some value stock lists these days.
So now what?
I wouldn’t worry too much about some of the week-to-week noise around these stocks. These are companies with massive competitive advantages that operate with enormous economies of scale. The pandemic saw many of these big tech companies attain sky-high valuations, and it was a long shot that earnings were ever going to increase fast enough to justify those prices. These recent movements simply show a bit of a reversion to the mean, and the stocks are all much closer to their long-term average P/E ratios going forward.
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