Summary

Despite impressive earnings reports from Apple and Microsoft, their stock prices did not significantly increase, suggesting the market may be overvalued.

Abstract

The article discusses the recent earnings reports of Apple and Microsoft, two of the largest US companies with a combined market cap exceeding $4 trillion. Both companies reported strong earnings, with Microsoft's revenue growing by 17% annually and Azure's revenue growing by 50%, surpassing analyst expectations. Apple also had a record-breaking quarter, surpassing$ 100 billion in revenue for the first time, with significant growth in iPhone and services revenue. However, the stock market reaction was muted, with both companies' stocks experiencing minimal gains or even declines post-earnings. This is attributed to the already high valuations of these tech giants and the possibility that the market is overheated, as evidenced by the recent GameStop trading frenzy and a GDP growth rate that did not meet expectations.

Opinions

The market's reaction to Microsoft and Apple's earnings suggests that their stocks may be overvalued, as even exceptional financial performance did not lead to significant stock price increases.
The article implies that the stock prices of Microsoft and Apple have been artificially inflated due to a flood of investment seeking decent returns, especially since the onset of the pandemic.
There is a concern that the current bull market may be nearing its peak, with the potential for overexuberant investor behavior, as indicated by events like the GameStop short squeeze.
The article questions how much higher the stock market can go, given the high valuations and the recent pullback in the S&P 500 (SPY), which was down 2.5%.
The GDP data for Q4 2020, which showed a growth rate of 4% instead of the estimated 4.3%, along with an overall annual decline of 3.5%, casts doubt on the sustainability of the market's high valuations.

Two Reasons the Market Is Overvalued

Apple and Microsoft

The two biggest US companies, Apple and Microsoft, have a combined market cap of over $4 Trillion. Let that sink in for a minute just how heavily valued these two goliaths are.

Both companies reported earnings this week. Microsoft reported Tuesday after hours, and Apple Wednesday after hours. And how were their earnings? Amazing. But you wouldn’t know that based on how their stocks moved afterward.

Microsoft reported revenue grew 17% on an annualized basis. Their earnings were $2.03 per share vs estimates of $1.64 and revenue was $43.08 billion vs estimates of $40.18 billion.

Revenue from their Intelligent Cloud business segment totaled $14.60 billion. This is the segment that contains Microsoft Azure. That’s their baby. Azure is a cloud computing service that rivals Amazon’s AWS.

Azure’s revenue grew 50% this quarter compared to analysts' estimates of 42% growth.

Azure is a big driver of Microsoft's future success. With solid growth this past quarter, the stock had to be up big right?

Afterhours Tuesday, Microsoft’s stock was up from the closing price of around $232 to over $240. It lost some steam and opened Wednesday at $238. As the market sold off Wednesday, Microsoft closed the day around $233. Not much of a gain from Tuesday to Wednesday.

First Earnings Season of 2021 Is Here

Most of the big names report this week or next

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Apple had earnings just as impressive. This the headline about Apple’s quarterly earnings from CNBC:

Apple reports blowout quarter, booking more than $100 billion in revenue for the first time

And another article title from CNBC:

Welcome to the super cycle: Apple just had the best quarter in the history of the smartphone

Some pretty exciting statements, the stock’s reaction, not so much.

Apple’s numbers were pretty impressive. They did better than consensus estimates on EPS, revenue (up 21% YoY), iPhone revenue (up 17% YoY), services revenue (up 24% YoY), and gross margins. The list goes on but you get the point.

Sales for every product category rose by double-digit percentage points as Apple crossed the symbolic $100 billion revenue mark in a single quarter. It’s estimated that Apple shipped more phones during the quarter than any other smartphone vendor ever has in a single quarter.

Tim Cook, Apple’s CEO, thinks these numbers could have been even better if the pandemic didn’t force Apple to close stores throughout the world.

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Apple’s stock closed at $142 Wednesday before the earnings announcement. Today it’s trading at $139. It’s down after that amazing earnings report. Most of the market is up today, but not Apple and those big numbers.

So what gives? Why did the two biggest companies have stellar quarterly earnings but their stocks didn’t go up?

These stocks have been propped up so much it's hard for them to go even higher. Even when it’s justifiable by solid earnings. The market and big tech stocks are already trading at extremely high valuations. Stocks that have done well since March, like Microsoft or Apple, would need ridiculously good earnings to send them even higher off of the news.

Because people needed to put their money somewhere to get a decent return, they flooded the biggest stocks in 2020. These companies have been going up, up, and up, as they constantly set new record highs.

With stocks at record highs, there is reason to believe the market is overvalued. How much higher can it really go? Most bull markets top off with exuberant behavior. Is that what we’re seeing now with the GameStop squeeze? Or was the pullback yesterday, as SPY was down 2.5%, the market just taking a breather from the excitement, and will get back to its positive days?

GDP data for Q42020 was released this morning. GDP grew at 4%, lower than the estimates of 4.3%. 2020 overall saw GDP decline by 3.5% for the year.