First-quarter 2022 earnings are rolling in amid a tidal wave of fear. Economic growth was starting to slow after a solid rebound from early effects of the pandemic in 2021, but Russia's invasion of Ukraine added to that slowdown. The Federal Reserve's promise to aggressively hike interest rates this year in an attempt to fight inflation is only adding to the worry.
And yet despite these concerns, big tech continues to be a solid place to invest cash for the long haul. Three Fool.com contributors especially like Amazon (AMZN 0.80%), Alphabet (GOOGL 0.34%) (GOOG 0.24%), and Netflix (NFLX 0.43%). Here's why.
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Don't sweat retail, Amazon's cloud is booming
Billy Duberstein (Amazon): The post-earnings sell-off in Amazon seems pretty overdone. While it's true revenue only came in line with expectations and earnings surprisingly went negative, there were a lot of moving pieces. Inflation, the war in Ukraine, and the omicron variant of the coronavirus all conspired to increase Amazon's costs last quarter, but those should subside over time. While guidance also disappointed, that was largely due to Prime Day moving from the second quarter last year to the third quarter this year. The upcoming quarter will also be the last in which Amazon will be lapping the widespread adoption of vaccines, so comparisons should get better in the second half of the year.
Meanwhile, arguably the most important component of Amazon, Amazon Web Services (AWS), grew 37%, actually beating analyst expectations. In addition, AWS's operating margin jumped pretty significantly, from 29.8% in the fourth quarter of 2021 to 35.3% in Q1. Although this was due to management extending the useful life of servers, that should be a permanent improvement. Oh, and on the conference call with analysts, management disclosed the AWS backlog was up even higher than revenue, up 68% to $88.9 billion.
Savvy investors should understand AWS is probably the most valuable part of Amazon, and it beat analyst estimates for revenue and profits. Therefore, any post-earnings dip should be bought on the perceived weakness in retail.
But was retail even that bad? The strengthening U.S. dollar hurt headline sales growth figures by about 2% and international sales by 6%. Meanwhile, this quarter lapped the most intense growth period from the first quarter of 2021. On a constant currency basis, online stores fell 1% on top of 41% growth a year ago, and third-party seller growth was 9% in constant currency on top of 60% growth. Advertising outgrew e-commerce, up 25% on top of 76% growth a year ago. On a two-year "stacked" basis, those are pretty darn good numbers.
Meanwhile, management said Amazon had planned for so much capacity and hired so many people over the past year that it had gone from understaffed and under capacity to overstaffed and over capacity. That sets the stage for much better retail numbers in the second half of the year, when the comps get easier for sales, and Amazon slows spending to grow into the massive capacity it's built over the past two years.
Amazon often trades down after earnings because there are so many moving parts that there is usually a wrinkle to be found somewhere, but long-term investors should view these knee-jerk moves as an opportunity.
The internet will continue to transform the economy for a long time
Nicholas Rossolillo (Alphabet): Alphabet's Google internet business is proving to be an incredibly resilient growth story. It's incredible to think that after just 24 years of existence, this business just hauled in $68 billion in sales in a single quarter (a 23% year-over-year increase) and generated a 30% operating profit margin.
In the grand scheme of things, the internet is still pretty fresh technology. It continues to rapidly evolve and reshape the global economy. Practically a catalog of the internet itself, Google is positioned like no other business to benefit from the worldwide web. Besides its core search business monetized via ads, it owns YouTube -- hands down the world's most-watched internet TV service with billions of viewers every month. Google Cloud also continues its torrid pace of growth. It grew revenue 44% in Q1 to $5.8 billion.
Underpinning these and many other businesses in the Alphabet family is a massive balance sheet featuring $134 billion in cash and short-term investments, offset by just $14.8 billion in debt. Alphabet is flexing its muscles here and using some of this cash (and its quarterly free cash flow, which weighed in at $15.3 billion in Q1) to repurchase stock. Alphabet's board of directors just approved an additional $70 billion in share repurchases. For the investor looking for income, this is no cash dividend, but nonetheless a huge return of capital to shareholders.
After the last earnings report, Alphabet stock trades for less than 23 times trailing-12-month free cash flow. Given its steady pace of growth -- especially its impressive profit growth -- the internet giant looks like a long-term steal to me at these levels.
Netflix is the best bargain of the bunch -- and it's not even close
Anders Bylund (Netflix): I've said it before and I'll say it again. Netflix was a fantastic buy before it took a nosedive on the first-quarter earnings report. Now, it's simply the best buy on the market. You don't see crystal-clear investment opportunities like this every year, and only once or twice per decade.
Yes, I know Netflix lost subscribers for the first time in many years, and that the losses are expected to accelerate in the next quarter. Surely, Netflix has run out of potential clients and its formerly impressive growth has hit a brick wall, right? That's the whole thesis behind the post-earnings share price drop of nearly 50%. Netflix is trading at prices not seen since the fall of 2017, so there must be something fundamentally wrong here.
Not so fast. The bears are quick to gloss over the fact that streaming video still accounts for a tiny minority of the average consumer's screen time, which is still dominated by old-school cable and broadcast TV. Netflix only has 220 million paid memberships today, in an addressable global market of 1.7 billion TV households. The conversion to digital video will only accelerate as developing nations get better access to broadband internet connections and reliable online payment systems.
It's tempting to talk your ear off about Netflix's massive growth prospects and amazing share price discounts, but let's save that for another day. This elevator pitch should be enough to make you think about the ridiculous mismatch and the wealth-building returns you'll get from the Netflix shares you buy at these multiyear lows.
