Suddenly Tech Is a Margin Story

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Technology stocks are usually all about growth, but in the last few days costs have been the talk of the town more recently.

Facebook (FB) is the big example, losing a record $119 billion of market value yesterday. Slower growth was part of the problem, but most analysts screamed about margins contracting from 47 percent to 44 percent as headcount surged. Management darkened the mood further with predictions the weak earnings trend would continue for several years.

Twitter (TWTR) dropped a similar bomb today by saying capital spending would increase. Both social-media giants are trying to clean up their businesses, which entails greater user oversight and removal of some accounts. That, in turn, makes it harder for the companies to attract advertising dollars, creating risk of further profit squeezes.

MasterCard (MA) had similar problems despite being a very different kind of technology firm. Its operating expenses rose 23 percent, outstripping the 20 percent growth in revenue. The reason is higher IT spending on security measures. While MA’s news was much less jarring than FB’s or TWTR’s, it’s another example of a tech stock needing to “clean up” after a period of rapid growth.

Not all tech stocks suffered the same fate. Two other large names surprised to the upside. (AMZN) is most prominent. Last night the e-commerce giant missed revenue estimates as business grew less than expected. But it generated 3.7 cents more profit for every dollar of sales, resulting in a big earnings beat. Analysts cheered the news as evidence of a more lucrative financial trend. One reason was a new policy of selling ads on its website. Its AWS cloud-computing division surpassed forecasts as well.

The other positive margin story in tech was Alphabet (GOOGL), whose traffic acquisition costs decreased relative to revenue. There were also signs that operations like YouTube are making money. That spurred hopes the company’s start-up businesses will evolve from money-holes into profit centers.

In conclusion, there have been winners and losers in tech this earnings season. But the real interesting news may be the way importance is shifting from simple growth to profitability.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.