3 learnings from earnings season: Big tech is shrinking, oil is growing & waste is flowing

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Earnings season. It's that time of year when publicly traded companies tell the public how they're going, how much they've sold, did they make a profit? And what their plans are for the future? We've just got through earnings season for the third quarter. That's from July to September of this year with thousands of companies listed in America and tens of thousands listed across the world. There's a lot to be across, way too much for us to get our heads around. So I've asked three of my colleagues here at Equity Mates to join me and each share one thing that caught their eye from this reporting season. They were in the hot seat. First, it's Bryce Leske, the co-founder and CEO of Equity Mates, Bryce, welcome to The dive. 

Bryce: [00:00:52] Thank you, Sascha. Great to be back. 

Sascha: [00:00:53] Two appearances in one week. I'm feeling very lucky. I'm sorry. It hit me. What is the one thing that you've learnt this reporting season? 

Bryce: [00:01:01] Well, Sascha, my big takeaway is something we've spoken about on Equity Mates Investing podcast is that big tech gets smaller. You may be familiar with the FAANG stocks. 

Sascha: [00:01:11] I am . I don't ask me to tell you what they stand for. I'm terrible with acronyms. 

Bryce: [00:01:17] Well, they were the group of five highflying names that really characterised the 2000 and tens. That was Facebook, Apple, Amazon, Netflix and Google. Let's just put some numbers to it. In the 2000 and tenths that is up to the end of 2019, Facebook was up over 400%. Apple was up 900%. Amazon was up a whopping 1,200%. Netflix was up more than 4,000% and Google was up 350%. Big tech kept getting bigger in the 2000 and tenths. These were the stocks that made people rich over the last decade, and they became the biggest companies in the world during the pandemic. They kept on rolling. But Sascha, 2020, too many of them have fallen back to earth. 

Sascha: [00:02:02] So what does falling back down to earth look like? It's a great visual image, but what are we talking about in percentages? 

Bryce: [00:02:09] So in 2022 year to date, Facebook is down 71%. Apple is down 24%. Amazon is down 47%, Netflix down 57%, and Google down 39%. So big tech is now getting smaller.

Sascha: [00:02:25] So what do we call it, medium sized, moderately portioned tech. What's the new fries? 

Bryce: [00:02:31] I know they're still big, but they're getting smaller. They're still at the top. Market cap is huge, but their Q3 results help us understand why this is happening, Sascha. So here's a few key takeaways from some of the big FAANG names. Let's start with Facebook, which changed its name to matter. 

Audio Clip: [00:02:47] What I would start with is that media today is a far cry from what Facebook was just one year ago.

Bryce: [00:02:53] They've announced they lost $9 billion in their virtual reality and Metaverse Division just this year, and they reported their second consecutive quarter of advertising revenue decline and predicted a third one coming. Not good news for Facebook. If we head to Apple, it just keeps on going. $90 Billion revenue in just three months. 90 billion in revenue in three months. That is up 8% compared to the same three months last year. And profit of 21 billion, up 4% from last year.

Sascha: [00:03:26] Hang on. So their stats are going in the right direction, but they've still fallen. 

Bryce: [00:03:30] They are, Sascha. Yes, it is confusing. You're pointing out a great fact. Everything you watch for in Apple's numbers were services revenue up iPhone sales up revenue from America, app revenue in China, R&D spending up, MAC sales up. Sascha, it's all up. But one thing that was down, iPad sales down 13% going forward. Apple did warn as well that iPhone production would be disrupted by China's COVID zero policy. 

Sascha: [00:03:56] Okay. Tell me about one of the other areas. What about Amazon? 

Bryce: [00:03:59] So Amazon sales were up 15% to 127 billion for the quarter. Not bad. Massive number, but profit halved from 4.9 billion in quarter three last year to two and a half billion and without a US Amazon Web Services, whose profit is 5.4 billion, Amazon would have lost about 3 billion for the quarter. So what was once the Darling E-commerce platform is now losing money. You don't want to be a retailer losing $1 billion every month. Not good. 

Sascha: [00:04:29] Okay. What about Netflix? The crowd drops today, so I think there'll be lots of subscribers tuning in. But what's happening with their reporting? 

Bryce: [00:04:37] I know the Crown is on your list. You've spoken about it every day for the last seven days, but Netflix have turned things around after two bad quarters for subscribers in Q1. They lost 200,000 subscribers. In Q2 they lost 970,000 subscribers, but they turned it around in Q3. Maybe people knew the crown was coming, adding 2.4 million subscribers and taking their total to. 223 million subscribers worldwide. 

Sascha: [00:05:03] That is massive. That is a huge portion of the population. I'm sure that they're not all watching a fictional retelling of the English monarchy, but, you know, one can imagine. So tell me about Google, the last in this acronym.

Bryce: [00:05:16] So Google, now known as Alphabet, is growing, but growth is slowing. It was the fifth quarter in a row where Alphabet reported slower growth. Revenue of 69 billion for the quarter was up 6% year over year compared to last year, where the company reported 65 billion in revenue, which was up 41% year over year. One interesting thing for Google, YouTube ad revenue was down from last year, which is a surprise given how much the Equity Mates office complains about YouTube ads. Except me because I subscribe and I wholeheartedly recommend doing that. So as you can see, Sascha just rounded out the FAANG stocks. While some of them are still growing, they're growing at slower rates and we can see that some of them are actually losing money where over the last decade they've been absolutely churning. So the big takeaway from me this reporting season, big tech is getting smaller. 

Sascha: [00:06:08] Moderately sized tech. That's the future name for it. But it's interesting to hear about how they've all got such different stories, but they are often just grouped together really easily. But that's not the case when you dig into the numbers. All right. So that's what we heard from Bryce. I'm now welcoming another one of my colleagues. It's been a long time since I've heard from you. But Simon Harvey, welcome back to The Dive. It's a pleasure to welcome you back to the hot seat. What are you going to tell me today about reporting season? 

Simon: [00:06:39] Thanks, Sascha. Great to be here again. We just heard from Bryce. The big tech companies are having a tough year, but what I've learnt is that for the oil and gas companies, this has actually officially been the best year ever. The world's five biggest oil and gas companies alone have made a combined profit of $170 billion so far in 2022. Around the world, they have raked in record profits in recent months, thanks mainly to the surge in the price of oil and natural gas after Russia's invasion of Ukraine. 

Sascha: [00:07:09] So. Simon, oil production is a global industry. Where are we going to start with these statistics? 

Simon: [00:07:16] Well, let's start in the UK, shall we? Shell recently announced global profits of 9.5 billion between July and September, and so nine months. So far this year, they're standing $30 billion from January to September. And this is compared to last year, it was around 12.8 billion for the same period. Amazingly, the share price is up 50% already this year and it's now actually the largest company in the UK by market cap.

Sascha: [00:07:42] Alright, so what's happening in the US then? Tell me what numbers we're seeing over on American soil. 

Simon: [00:07:48] So in the US the standout has got to be ExxonMobil that just reported a record breaking quarterly profit of nearly $20 billion and this was $4 billion more than analysts had actually forecast and almost matching that $21 billion of earnings. We just heard from Bryce that tech giant Apple made in the quarter. They are smashing it. The share price is up 15% in the last month alone, an 80% year to date. Exxon's record profits were helped by a much criticised decision to pin its future hopes on fossil fuels, even at a time when its European competitors have shifted their attention to more renewables, the company said in their reporting they've actually spent $5.7 billion on new oil and gas projects just over the last quarter, a 24% increase on what they spent a year before. 

Sascha: [00:08:35] Well, Simon, and we've saved the biggest one until last. Tell me about Saudi Aramco.

Simon: [00:08:42] But even ExxonMobil looks small compared to the state owned Saudi Aramco in Saudi Arabia. They have reported the second highest quarterly profit since listing shares in 2019, generating net income of 42.4 billion in just three months. 

Sascha: [00:08:58] All right. So, Simon, you kind of touched on it before when you said that some of Exxon's decisions were highly criticised. I feel like we're ignoring the elephant in the room. Well, we don't talk about the political ramifications of these oil profits.

Simon: [00:09:15] Is spot on. Sascha. These extraordinary profits have also attracted a lot of political attention. Joe Biden said recently. 

Audio Clip: [00:09:22] Why don't you tell them what Exxon's profits were this year? This quarter, Exxon made more money than this year.

Simon: [00:09:27] And with high energy prices being felt all around the world and fuelling a cost of living crisis, the oil companies are increasingly in the crosshairs of governments in Europe and the US, which are exploring additional levies and windfall taxes to help fund more cost of living support. In Europe. This has already happened in many countries. In the UK, for example, BP said it expected to pay over an additional £650 million under the government's new 25% energy profits levy. But amazingly, Shell has paid zero windfall tax. We've just heard they made over $30 billion so far this year, but they've managed to actually get away from paying zero windfall tax, which has prompted calls for the Government to overhaul the scheme that was supposed to raise billions to tackle the cost of living crisis. 

Sascha: [00:10:15] And Simon, it's really fascinating. We're having this conversation right now because COP 27, the UN climate summit, is currently taking place in Egypt. 

Simon: [00:10:24] That's spot on. And so far, while leaders have tended to agree on the risks of global warming, their speeches have revealed huge rifts, particularly over whether fossil fuels could actually play a role in a climate friendly future. 

Sascha: [00:10:36] Well, Simon, thanks for bringing such a complicated but interesting topic from the reporting season. It's great to welcome you back to the dive. We're going to take a short break. And then when we come back, I'm going to be joined by Alec Renehan, who I think has saved the best for last. Welcome back to The Dive today. We're talking about the learnings that we've picked up over the reporting season. Christmas comes once a year, but reporting season, what comes four times a year? Alec, I think that's your favourite saying. 

Alec: [00:11:14] Yeah. For reporting season, it feels like it never ends. But yeah, in America every quarter. So we got heaps to talk about. 

Sascha: [00:11:22] Sascha, look, I didn't introduce you properly, so yes, I'm joined by my colleague Alec Renehan. Here it is here. I have promised the best for last. It's definitely the most interesting for us or the most unexpected. I was pretty shocked when I saw this headline drop into the pitch document. So tell me, what have you picked up from the reporting season? Well, I. 

Alec: [00:11:41] Just want to defend Simon and Bryce here, both two very interesting stories. But I think where you're going with mine is a little bit out of left field and it's what we can learn from the waste industry because we love strange indicators here. Learning about the stock market, learning about business can tell us so much about the world and who would have known that the waste industry is one to watch, to know how the economy is going to know if a recession is coming.

Sascha: [00:12:11] I mean, I certainly didn't think of it, but now that I'm starting to consider it, it does make a lot of sense. 

Alec: [00:12:17] Yeah, it does. When the economy is not going so well, when people are worried about their jobs or they have lost their jobs, or in this environment, when interest rates are rising and people have to put more and more money towards their mortgage, what do they stop doing? They stopped buying stuff, and that means they stop making as much waste. And then when companies aren't doing as well, when they're saying their sales slowed down, what do they stop doing? They stop making as much factories stop making as much, they stop sending as much to retailers, and then there's less waste there as well. So one of the best indicators of whether a recession is coming is how much waste a country is producing. And to get an example of that, I looked at Waste Management, the creatively named company, which is the biggest waste company in America. And I looked at their annual reports from around the time of the global financial crisis in 2007, they collected 74 million tonnes of solid waste in 2008. So right in the middle of the GFC they collected 66 million tonnes of solid waste so that the amount of waste they collected was down 11% in one year. Waste is a great indicator of how the economy is going. 

Sascha: [00:13:32] Okay, so I'm on tenterhooks. What can we learn from the reporting season? What do America's biggest three waste providers tell us? 

Alec: [00:13:41] Well, Sascha, I've got good news for you. The consumer is holding up okay, at least for now. So let's start with waste management. America's biggest waste management company.

Sascha: [00:13:54] Then it says what it does on the. 

Alec: [00:13:55] Tapes it's the total volume grew at 1% year on year. So they collected and disposed of more waste this year than they did last year. Well this quarter they did the same quarter last year. Last year it grew at 3.2%. This year it's only grown at 1%. So it is slowing down but it's still growing, which is good. Waste Management also reported revenue up 9% to $5.1 billion and profit up 19% to $639 million. It's a good industry to be in the waste industry. If we look at the second biggest waste company in America, Republic Services, they also reported increased volume up 2.2% this quarter. Their revenue was up 23%, their profit was up 19%. So it seems like things are going pretty well in the waste game at the moment. 

Audio Clip: [00:14:52] Now as we think about next year. Right, we're planning on those growth rates modulating a bit just because we're reading the same things you are around some economic pullback. But you know, frankly, I would have expected to see some of that already. We remain very, very positive. 

Alec: [00:15:08] And that one final company, waste connections, their revenue was up 18%, their profit was up 16%, but interestingly their volume was down a little bit, their volume was down less than 1%, but still down. So maybe warning signs on the horizon, but nothing like what we saw during the GFC. 

Sascha: [00:15:29] Yeah, I like that it is fascinating. Interesting to pull out these indicators that we had no idea about. I'm still stuck on the fact that we produce that much waste, like 66 million tonnes of solid waste in the middle of the GFC. Where does that all go? I know that's another question for another day, but massive numbers.

Alec: [00:15:50] Well, Sascha, here's a not so fun number to finish on. Globally, we produce over 2 billion tonnes of waste a year.

Sascha: [00:15:57] Wow. Okay, well, that's going to make me look at my recycling bin. And make some choices to make sure I'm not contributing. I think that is the perfect end for today's episode. So there you go. Three learnings from Reporting Season. If you have any takeaways from the reporting season, then get in touch with us. All the details are in the show notes below. If you've enjoyed this episode, then please tell a friend about it. It is the best way for this podcast to go and we would love to reach more people. If you've just joined us for the first time, then welcome. Go check out our back catalogue. If you're following us on Instagram, we've actually got a new home. Our handle now is at the dive. Business news. All one word. If you can't remember that, if you're on the move, if you don't have a pen and paper that is in the show notes below. You can always contact us by email as well thedive@equitymates.com And you can subscribe wherever you are listening right now so you never miss an episode. Thanks so much to my three colleagues for joining me today. I hope you want something until next time.