Earnings season started to ramp up this week, with three of the trillion-dollar market-cap companies reporting: Microsoft Corp. (NASDAQ:MSFT), Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL). These companies make up a huge chunk of the NASDAQ’s returns and serve as a bellwether for earnings season overall.

So, how did these companies actually do this quarter? Let’s dive right in.

Microsoft Corp. (MSFT): Second-Quarter Earnings Announced on Tuesday, January 25

Well, Microsoft went into earnings season with a bang this quarter, with their acquisition of the gaming giant Activision Blizzard (NASDAQ:ATVI) for $69 billion. (I talked about the acquisition in detail in this Market360.) Microsoft plans to expand its presence in the metaverse with the acquisition of the company responsible for games such as Call of Duty, Candy Crush and World of Warcraft.

While the news of the new acquisition took center stage, there was another focus that caught the attention of many investors: Microsoft’s cloud computing software, Azure grew by a notable 50% year-over-year (YOY) to $18.33 billion in revenue. However, these results were in-line with analysts’ estimates for $18.3 billion.

Overall, second-quarter revenue rose 20% YOY to $51.73 billion, which topped analysts’ estimates for $50.88 billion. Second-quarter earnings increased 22% YOY to $2.48 per share, up from $1.46 per share in the same quarter a year ago. Analysts were expecting earnings of $2.31 per share, so Microsoft posted a 6.9% earnings surprise.

Microsoft’s finance chief, Amy Hood, told investors that demand is still strong despite the large market selloff. The company has experienced its worst month since 2010 this January, down over 14%. However, the stock started to turn around once news of a positive sales forecast for next quarter boosted morale, rallying 2.8%.

A great way to check up on a company’s fundamentals, during earnings season or not, is my Portfolio Grader tool. Let’s take a look at MSFT stock:

Overall, MSFT does not have too bad of a report card here. But with an F-rating in Earnings Momentum, it’s also not a great one. Overall, the Quantitative Grade saves the tech giant here and brings up its Total Grade to a B-rating.

Tesla (TSLA): Fourth-Quarter Earnings Announced on Wednesday, January 26

Tesla had an interesting quarter. While its earnings were strong, its forward guidance was not. Let’s start with the earnings numbers. Adjusted earnings per share of $2.54 per share topped analysts’ expectations of $2.38. So, the company posted a 6.9% earnings beat. Revenue came in at $17.72 billion, versus estimates for $16.64 billion, for a revenue surprise of 6.5%

Even though it’s the company’s fourth-consecutive earnings “beat,” this quarter marks the smallest margin TSLA’s earnings have beat analysts’ estimates during the past year. During the earnings call, though, company management stated that its factories have been below capacity for several months due to supply-chain issues that are unlikely to stop anytime soon.

This news spooked investors and the stock dropped about 12% on Thursday. Despite the supply-chain issues, Tesla still expects above 50% sales growth for 2022.

In addition, Tesla had $17.6 billion in positive cash flow. Keep in mind, Tesla’s net income was $5.5 million (GAAP) after spending $6.5 billion to build new factories and what the company noted as “other capital expenditures.” The company posted a gross margin of 30.6% on its vehicles this quarter, which decreased to 29.2% when excluding regulatory credits. The company reported its second-smallest regulatory credit numbers in the last five quarters.

Tesla also noted during the earnings call that the company would begin prioritizing the development of a humanoid robot project called Optimus in 2022. It also unveiled a fleet of the “Tesla Semi” electric trucks and confirmed that production of the Model Y cars began at the Gigafactory in Texas. The company once again delayed production of their Cybertruck due to the supply chain issues, with no real timeline given during the call.

Tesla has the only ‘C’ for Total Grade of all three of these trillion-dollar tech giants. Its cash flow and poor Quantitative Grade, which tells me that it’s not seeing strong institutional buying pressure, weigh heavily on its rating here.

Apple, Inc. (AAPL): First-Quarter Earnings Announced on Thursday January 27

Apple posted impressive first-quarter earnings for its fiscal year 2022, reporting their biggest single-quarter revenue.

Sales of $123.94 billion were up 11.2% from a year ago and beat analysts’ expectations by $5.4 billion. That means Apple had a revenue beat of 4.6%. Earnings per share topped analysts’ expectations of $1.89 by 11.3%, coming in at $2.10 and growing 25% YOY.

iPhone revenue was up 9%. Apple Watch and Airpods revenue were up 13%, and Mac revenue was up 25% YOY. The only figure that wasn’t positive in the report was iPad revenue, which was down 14% YOY. Apple’s Services category, which includes Apple Music, iCloud and the App Store revenue, also beat expectations and was up 24% YOY.

Apple CEO Tim Cook noted during the earnings call that the company’s supply chain issues were improving, which sent the stock up 7% on Friday.

And here is Apple’s Portfolio Grader report card; the operating margin growth and earnings growth both have D-ratings, but its B-rating for its Quantitative Grade bumps the Total Grade up to a ‘B’.

The Bottom Line

There’s no denying we’re in a very volatile market, but the good news is earnings are working, as investors cheered Microsoft’s and Apple’s earnings results and turned away from Tesla following its weak guidance.

So, right now I am optimistic about the market as we move deeper into the fourth-quarter earnings season. With that said, the market will grow more narrow as YOY earnings comparisons become more difficult. So, it’s more important to be invested in fundamentally superior stocks, as these should be the companies investors turn to as Wall Street grows more fundamentally focused.

Personally, I’m very excited about my Growth Investor stocks this earnings season. During this fourth-quarter announcement season, the average stock in the S&P 500 is forecasted to post 12.1% annual sales growth and 20.1% annual earnings growth.  By comparison, my average Growth Investor stock is characterized by 33.4% annual sales growth and 45.6% annual sales growth.  The S&P is trading at 22 times forecasted price-earnings (PE), while my average Growth Investor stock is trading at a median forecasted 2022 PE of 20.3.  In other words, thanks to the recent correction, my average Growth Investor stock is no longer trading at a premium forecasted PE ratio.

I should add that in the past three months, the analyst community has revised their consensus earnings estimate up 12.1% higher for my Growth Investor stocks.  This is a very good sign, since positive earnings revisions typically precede future earnings surprises.

For more information on my Growth Investor stocks and what I expect from the stock market in the coming weeks, I encourage you to sign up for my Growth Investor service today. Once you do, you’ll have full access to my latest recommendations – one that should be a big benefactor in the accelerating electric vehicle (EV) industry and two divided growth stocks that earn a AA-rating (an A-rating in Portfolio Grader and an A-rating in Dividend Grader).

Sincerely,

Louis Navellier

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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Microsoft Corporation (MSFT)

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