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Global equity markets finished the year on a tear as investors gained confidence that inflation had abated and interest rate hikes were in the rear vision mirror. There was a clear bifurcation however, with the bounce led by a small number of suspects (we’re looking at you big tech) while 70% of companies in the S&P500 underperformed the index in 2023.
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EML Payments Ltd (ASX: EML) has indeed charted a tumultuous course over the last five years, captivating investors with its roller-coaster share price and stirring the investment community with its complex structure and bold acquisitions. Peaking at an enviable high of over $5 in April 2021, the company’s valuation has since experienced a significant recalibration, prompting diverse perspectives and intense scrutiny.
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As we highlighted in our previous article back in November, the so-called “Magnificent 7” contributed a substantial proportion of the S&P 500 gains during 2023. Come the beginning of 2024, it was time to see whether these blockbuster share price performances were justified. Nvidia (NASDAQ: NVDA) is the only one of the 7 yet to report, with this scheduled for 21 February (there shouldn’t be a need to mark your calendar as there will likely be considerable media coverage). The remaining six (Alphabet, Amazon, Apple, Meta, Microsoft and Tesla) each reported their earnings for the October to December period in the last week. Often viewed as a group, their performance was, in fact, quite varied. Let’s start with the good and take it from there. Note: All figures are quoted in U.S. Dollars.
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As we highlighted in our prior market insight, 2024 is set to be a historic year for elections, with more than 2 billion of the world’s population across 50 countries set to head to the polls. The most widely publicised is undoubtedly the United States, where the primaries so far seem to indicate a rematch of the 2020 election between Joe Biden and Donald Trump–candidates facing unpopularity, impeachment and felony charges, along with questions about their age and competence to serve out another term. As Zachary Karbell of the Wall Street Journal recently stated: “the upcoming 2024 presidential election depresses everyone.”
Karbell goes on to explain that according to most polls, Americans ended 2023 in a sour mood. Their trust in public institutions, ranging from the Supreme Court to the media and the military fell to near record lows. Furthermore, 80% of Americans are worried about the economy and believe it is deteriorating and two-thirds said that the country is “on the wrong track.” War in Ukraine and the Middle East created a sense of a world in conflict and the surge in illegal immigration has risen to a level that both parties are beginning to support a forceful response. Economic Gains and (Slightly) More EqualityYet despite this pessimism, economic data paints a slightly different picture. U.S. unemployment remains exceptionally low at just 3.7% and job openings remain highly elevated at approximately 8.8 million, more than 20% above pre-pandemic levels. Gross Domestic Product (GDP) data, a broad indicator of economic growth, has been strong in the past two quarters (3.3% and 5.2% annualised, respectively), both surpassing market pundits’ expectations. Not only has the U.S. economy rebounded strongly from the pandemic trough, but it has even proved more equitable. The gender pay gap fell to a record low–with women receiving 83.8% of what men were paid in 2023, according to the U.S. Bureau of Labor Statistics. The period of record low interest rates since the Global Financial Crisis has been extremely detrimental for equality, pampering the wealthy who own the majority of financial and real estate assets, and punishing savers trying to get ahead. However, severe employment shortages over the past several years have skewed the pendulum slightly back towards employees–as can be witnessed by the strong annual wage growth and the confidence in recent union negotiations, including those by the United Auto Workers, which represents employees at Ford, General Motors and Stellantis (formerly known as Fiat Chrysler), and the Writers Guild of America, which represents approximately 11,500 screenwriters in the entertainment industry. On average, the bottom 50th percentile of Americans saw their net worth rise 65%, the biggest proportional increase of all wealth brackets. The real (after inflation) net worth of the median household has also performed well, seeing a 37% increase between 2019 and 2022–the largest 3-year increase on record.
Additionally, Ben Carlson from A Wealth of Common Sense provides an interesting contrast between the current economic situation and prior cycles. From the dotcom bubble recession in 2001 through the peak of the Global Financial Crisis in 2007, total financial assets grew only 64% while total liabilities grew 94%. In essence, consumers and businesses took on a level of debt that was not supported by wealth creation in the economy. Conversely, since the bottom of the GFC recession in the second quarter of 2009, assets have grown 136% while liabilities have increased just 40%. The $100 trillion increase in assets and $5.7 trillion increase in debt has meant that net worth has ballooned by nearly 160% from the bottom of the GFC. (All numbers are as of 30 June 2023 and would likely be more favourable today). Not to mention that a large portion of this debt is in housing stock, and household debt service ratios (that is, mortgage payments as a percentage of personal disposable income) are currently at their lowest levels in 50 years, outside of the pandemic dip. 
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Ron Shamgar recently joined the Ausbiz team and ten of the country’s leading small cap investment managers, presenting their high conviction stock ideas, sector thematics and opportunities. Watch what Shamgar had to say about Smartpay.
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Microsoft’s results were also impressive, which they needed to be following the company’s addition to the $3 trillion market cap club. Revenue of $62.0 billion increased 18% YoY (16% excluding the impacts of currency changes), and net profit was $21.9 billion, 33% higher than the pcp (or 26% ex-currency). Intelligent Cloud was again a key driver of Microsoft’s performance, with revenue growing 20% YoY to $26 billion, including a strong 30% YoY performance from Azure and other cloud services. Unsurprisingly given its investment in ChatGPT developer OpenAI, AI dominated the conference call. Examples included approximately 53,000 clients using its cloud-based AI platform Azure AI (one-third of which were new to Azure this past year) and an AI-infused Office was released for business users. Microsoft also completed its highly publicised acquisition of Activision Blizzard on October 13, which juiced Microsoft’s More Personal Computing division, which saw 19% revenue growth including 61% growth at Xbox. Guidance for the upcoming quarter was strong, and shareholders were rewarded with $8.4 billion in dividends and buybacks. They should be very satisfied with the company’s performance.
The Alphabet share price took a hit the day of its earnings release, but there was actually much to like about the search giant’s results. Revenue rose 13% YoY, with a further improvement in Google advertising revenue, which revenue increased 11% YoY to $59.0 billion, from +9.5% YoY in the prior quarter and +3.3% YoY in 3Q 2023. Google Search revenue increased 13% YoY and YouTube ads increased 16% while Google Networks remained weak (fortunately this contributes less than 10% of the company total). Google Cloud revenue increased 26% YoY, and perhaps even more importantly, Cloud profitability has accelerated since breaking even early in 2023, reaching a 9.4% operating margin in 4Q 2023. Like Meta, Alphabet showed better cost control, with CFO Ruth Porat showing the benefits of the 2023 cost drive. The employee count was 4% lower at the end of the year and another round of layoffs have begun already in 2024. CEO Sundar Pichai was very optimistic about the company’s ability to implement AI initiatives, and combining this with better efficiency could lead to some healthy profit growth in years to come. The share count also continues to decline, with a further $16 billion of share repurchases in 4Q bringing the 2023 total to $72 billion. Overall, a solid performance from Alphabet.
The Amazon share price jumped nearly 8% following the release of its results, as revenue growth surpassed market expectations. Overall it was a strong yet not entirely outstanding result from the online retail behemoth. Net sales in 2023 increased 12% from the prior year to $575 billion and net income swung from a net loss of $2.7 billion to a net profit of $30.4 billion. Retail growth was relatively consistent with North America revenue increasing 13% YoY and international revenue increased nearly 17% YoY. International still lost money but at a lower rate, while the North American operating margin expanded quite dramatically. Amazon Web Services (AWS) saw growth accelerate ever so marginally, but at 13% YoY, it was far below the growth rates of both Microsoft and Alphabet’s cloud platforms (although it is notably bigger, with annualised revenue now approaching $100 billion). Like the others, the AWS cloud margins expanded nicely, with operating income growing 38% YoY to $7.2 billion. Guidance for the first quarter was net sales growth of between 8% and 13%, consistent with the past two years but a significant slowdown from pre-pandemic growth rates. Additionally, capital expenditures continue to grow, particularly in AWS, following more than $160 billion spent by the company over the past three years. Time will tell if this is money well spent.
Apple shares are modestly down since it reported its 1Q FY 2024 earnings (ended 30 December 2023), which saw a revenue increase of 2% YoY to $120 billion. iPhone revenue rose 6% YoY to $69.7 billion, Mac increased 1% YoY to $7.8 billion and Services hit an all-time high, increasing 11.3% YoY to $23.1 billion. On the other hand, iPad fell 25% YoY to $7.0 billion and Wearables, Home and Accessories declined 11% to approximately $12.0 billion. Revenue grew across all geographies with the exception of Greater China, which declined nearly 13% to $20.8 billion–accounting for 17.4% of company revenue during the quarter. A hallmark of the Cupertino-based company, profitability was again excellent, with net income of $33.9 billion 13% above the pcp. EPS of $2.18 increased at a faster 16% pace due to share repurchases, which totaled $20.1 billion in the quarter. Overall, a respectable performance from Apple, particularly given the challenges in China, but the growth rate is likely far below what investors might expect from a company with its valuation.
The most lacklustre of the Magnificent Seven to report was undoubtedly Tesla. Revenue grew a very modest 3% YoY to $25.2 billion and shares have fallen nearly 10% since a less-than-impressive earnings call. In particular, investors likely focused on comments by CFO Vaibhav Taneja that volume growth in 2024 will likely be lower than in prior periods as the company focuses on the launch of the next-generation vehicle. This comes amidst a challenging time for Tesla given a general slowdown in the EV market and significantly greater EV competition (particularly in China and by Chinese exporter BYD). As has been frequent throughout Elon Musk’s career, there have also been a number of other recent distractions, including the overturning of his extraordinary $55 billion compensation package, the possible relocation of the company’s incorporation from Delaware to Texas, media reports about drug use, comments about launching an unaffiliated AI/robotics entity, and of course, the severe decline in profitability at X (formerly known as Twitter) following his take-private transaction in 2022. Musk undoubtedly has a loyal base of supporters and has proven his ability to navigate challenging environments before, and it appears that 2024 will be another busy year.
