Apple and Facebook’s Staggering Results Aren’t Sustainable

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The problem with posting blowout numbers is that it raises the obvious follow-up question: Can you top this? For Apple and Facebook, the answer may be no, or not anytime soon.

On Wednesday, the two tech giants showed the strength of their money-making prowess, with Apple Inc. reporting quarterly revenue of $89.6 billion in the three months ended in March, up 54% from a year earlier and exceeding the $77.3 billion Bloomberg consensus. Facebook Inc. generated sales of $26.2 billion in the period, an increase of 48% from last year that handily beat the $23.7 billion average analyst estimate. It was a record March quarter for both, though the prior three-months’ performance remains their high-water mark. Apple also announced a $90 billion stock buyback and increased its dividend by 7%. 

Despite the incredible results, Apple and Facebook shares rose relatively modestly in after-hours trading – about 2% and 6%, respectively. There are two reasons for that. First, both stocks have already enjoyed healthy gains over the past year, so a lot of good news was already priced in. More important, perhaps, is this: As impressive as these numbers look on an absolute basis, they must be taken in the context of where the economy was a year ago. Last March, businesses dramatically pulled back spending as uncertainty over the pandemic’s spread began. At the same time, Apple closed many of its retail stores, so the lapping comparisons were not arduous. The flip side is, it means the prospect for matching these performances in the future becomes mathematically more difficult. Here’s why.

Many of the pandemic-driven technology trends that benefited Apple and Facebook will probably dissipate. As employees return to physical offices, the work-from-home demand for Apple’s hardware — including iPads and Mac computers — may decline. Further, the semiconductor industry’s rising chip shortages could become a bigger problem for the company’s future production volumes. On its earnings call, an Apple executive admitted the company is being hurt this quarter by the pinch of supply constraints. Facebook, meanwhile, reiterated expectations for revenue growth to significantly decelerate during the second half of the year.

That may spell trouble for shareholders in the two companies. Slowing financial momentum is usually not a recipe for rising stock prices. There may also be a rotation to other technology companies with better growth profiles. Earlier this year, Facebook predicted that as the pandemic subsides consumers will soon shift spending from e-commerce purchases back toward physical experiences like travel. Already, investors have bid up Alphabet Inc.’s stock  this year, anticipating the internet search giant may grow faster because of its higher exposure to brick-and-mortar stores and services.

Apple and Facebook’s Staggering Results Aren’t Sustainable

And then there is the regulatory environment, which seems to be getting worse for Apple and Facebook. On Tuesday, the Financial Times reported that the European Union will soon issue charges against Apple, alleging its App Store business practices flout the EU’s anti-competition laws. Depending on the ruling, the smartphone giant may be forced to let developers link to external cheaper purchasing alternatives from inside their apps — a practice currently restricted by Apple. As for Facebook, lawmakers are actively scrutinizing the social media giant’s content-moderation practices and its use of acquisitions to stifle emerging competitors. At a minimum, it has become politically untenable for the social media giant to pursue large deals.

Given the backdrop of rising political risks and the likelihood of less impressive quarters ahead, it isn’t surprising that investors may be less than enthusiastic over the financial results of the two technology behemoths. Headwinds loom.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.

©2021 Bloomberg L.P.

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