It's been hard to ignore that artificial intelligence is a hot topic the last few months.

The generative engine ChatGPT opened in November and has quickly caught the imagination of the public.

There is even talk that Microsoft Corp (NASDAQ: MSFT), which is a major investor in the startup behind ChatGPT, could challenge Alphabet Inc (NASDAQ: GOOGL)'s two-decade domination of internet searches by injecting AI into Bing.

Already "a veritable rainforest of new AI startups is being freshly funded", according to Frazis Capital Partners portfolio manager Michael Frazis.

"While it won't be clear for some time which will win and which will fall…, one thing is certain: they will all [need] immense amounts of computing power," he said in a memo to clients.

"Power that, absent this revolution, may not have been required for many years."

As such, some investors are looking to gain exposure to companies involved in manufacturing computer chips or, their key ingredient, semiconductors.

The best semiconductor stocks in the world

Shaw and Partners portfolio manager James Gerrish was recently asked which are the best ASX shares of businesses involved in the semiconductor industry.

"When I think semiconductors, my first thoughts are international companies such as Qualcomm Inc (NASDAQ: QCOM), NVIDIA Corporation (NASDAQ: NVDA), Texas Instruments Incorporated (NASDAQ: TXN), Broadcom Inc (NASDAQ: AVGO), Intel Corporation (NASDAQ: INTC), Taiwan Semiconductors Mfg Co Ltd (NYSE: TSM), Samsung Electronics Co Ltd (KRX: 005930), etc," he said in a Market Matters Q&A.

"Unfortunately there are no companies of this magnitude on the ASX."

So Gerrish suggested the next best option could be exchange-traded funds. But again, they are overseas shares.

"Two of our preferred ETFs to gain exposure to the semiconductor markets are the iShares Semiconductor ETF (NASDAQ: SOXX) and the VanEck Semiconductors ETF (NASDAQ: SMH)," he said.

"Locally, at this stage, there aren't any companies on the Market Matters radar."

Frazis took the example of Nvidia to demonstrate how critical computer chips are to power an AI-driven future.

"Nvidia is partnering with Mercedes Benz Group AG (ETR: MBG) to power their next generation of cars from 2024, including level 4 autonomy, over-the-air updates, and best-in-class safety and convenience applications," he said.

"Nvidia is a small position for us, bought at lower prices, but their 81% market share in AI processing is now more relevant than ever."

The post What are the best ASX shares to buy for semiconductor exposure? appeared first on The Motley Fool Australia.

Last night the Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) stock price sank 7.4%, vaporising around A$144 billion worth of market capitalisation. The debilitating fall followed a glaring error from the tech giant's recently announced AI service.

Investors were not forgiving after the mistake, erasing the equivalent value of CSL Limited (ASX: CSL) from the search engine provider. In turn, Alphabet shares finished the day at $100 neat — still 11.5% above their starting price this year.

It's a 'Bard' look as Bing brings the heat

The rapid adoption of ChatGPT has piqued the interest of tech giants, and Microsoft Inc (NASDAQ: MSFT) was quick to join forces with OpenAI — the maker of ChatGPT — announcing a partnership last month.

Clearly, Microsoft is not playing around with making the most of the deal, with the company integrating AI directly into its search engine, Bing.

Not one to be outdone, Google also revealed its own AI implementation in search dubbed Bard. Much like Bing, the feature is meant to allow searchers the ability to ask questions in a conversational manner and return results produced by AI.

However, one of the company's first displays of the technology has cast doubt on Bard's usefulness and accuracy. The hiccup has taken a significant toll on the Alphabet stock price in the aftermath.

In a demonstration shared via Twitter, Google queried Bard for James Webb Space Telescope (JWST) facts for a 9-year-old. Impressively, three various dot points of information are swiftly supplied. But, it was quickly ridiculed for serving up false information — sending the Alphabet stock reeling.

Contrary to the AI's statement, the JWST did not take the first image of a planet outside of our solar system. An accolade, instead, held by the European Southern Observatory's Very Large Telescope.

A headwind for Alphabet stock

The stumble by Alphabet leaves a level of uncertainty around the dependability of the company's honeypot, search.

If Microsoft's partnership with OpenAI is able to deliver a better search experience, this could put pressure on Alphabet's all-important ad revenue.

Over the past year, the Alphabet stock price has fallen nearly 30%. Meanwhile, Microsoft shares have slipped by 14.3%.

The post How an AI demo erased $140 billion from Alphabet stock appeared first on The Motley Fool Australia.

Regular readers of The Motley Fool would not need reminding that technology shares took a brutal beating in 2022.

But with the S&P/ASX All Technology Index (ASX: XTX) up 15.5% already this year, one expert has declared the sector is back with a vengeance.

DeVere Group chief executive Nigel Green said that financial updates from US tech giants this week would commence "The Great Rotation back into growth stocks".

"As market conditions shifted in 2022, investors dumped growth stocks, like tech, in favour of value stocks which were deemed more suitable to the challenging environment," he said. 

"But what is happening now, we believe, is the beginning of a rebound."

Mixed results for tech giants

Green did admit the short-term results for big tech were mixed.

"Facebook's parent company Meta Platforms Inc (NASDAQ: META) has exceeded estimates for revenue in its fourth-quarter earnings report, with the stock soaring in extended trading on the results," he said.

"While Amazon.com Inc (NASDAQ: AMZN)'s earnings are expected at $0.15 per share, which would be an 89% decrease from the same quarter in 2021."

Green predicted that Apple Inc (NASDAQ: AAPL) would see declining revenue for the first time since early 2019.

"Alphabet Inc (NASDAQ: GOOGL), the parent company of Google, is expected to report a third consecutive quarter of declining earnings."

But this won't stop long-term investors piling back into the tech sector, according to Green.

He cited two reasons why The Great Rotation is on in earnest.

"First, valuations of tech and other growth stocks are currently low having been hit by the previous rotation into value stocks," said Green.

"Investors are now eyeing these super attractive entry points to top-up their portfolios as the trend is reversing."

Secondly, investors are looking forward to how macroeconomic factors might change.

"Inflation has seemingly peaked and interest rates are set to stabilise, which takes away a major obstacle for tech stocks."

Bet on still-cheap tech for strong returns 

Green thus declared that "tech stocks are back" and urged punters to take advantage.

"Rotation into the right growth stocks will provide strong returns."

He warned, though, that this is not a time for investors to "buy everything".

"There will be big winners and losers. They must concentrate on high quality, profitable companies which can consistently maintain or steadily grow margin[s]."

And despite lukewarm results, the tech giants shouldn't be written off.

"[They] still have piles of cash, in some cases hundreds of billions of dollars, and remain enormously profitable," said Green.

"In addition, these companies maintain considerable user bases, world-class research and development, plus some of the smartest talent on the planet."

The post 'The Great Rotation' has begun: Expert declares tech shares will provide 'strong returns' in 2023 appeared first on The Motley Fool Australia.

The US stock market could be in for a riveting week amid multiple household names reporting.

Analysts at ANZ Group Holdings Ltd (ASX: ANZ) are tipping the US Fed to raise rates at a meeting later this week.

The S&P 500 Index (SP: .INX) slid 1.3% overnight, the Dow Jones Industrial Average (DJX: .DJI)slipped 0.77% and the Nasdaq Composite Index (NASDAQ: .IXIC) slipped 1.96% on Monday, US time.

What's ahead?

ANZ highlighted it is a "big week for both central banks and US equities" in a research report released this morning.

Among the US stocks due to report earnings are Apple Inc (NASDAQ: AAPL), Meta Platforms Inc (NASDAQ: META), Caterpillar Inc (NYSE: CAT), McDonald's Corp (NYSE: MCD), General Motors Company (NYSE: GM), United Parcel Service Inc (NYSE: UPS) and Alphabet Inc Class A (NASDAQ: GOOGL).

ANZ senior economist Felicity Emmett said these earnings announcements will provide a "micro overview of the macro economy". She added:

Investors bought into the 'soft landing' view in early 2023, despite the prospect of what could still be a bumpy ride for activity as the lagged effects of last year's interest rates front-loading and still-high inflation bite. 

Meanwhile, the United States Federal Open Market Committee (FOMC) is due to announce an interest rate decision on Thursday morning, Sydney time. ANZ is forecasting a 0.25% rate rise.

Commenting on this outlook, ANZ's Emmett said:

We expect a 25bp rate rise and anticipate that the Fed will caution against an early pause in the tightening cycle and certainly give the notion of cuts no rein.

Risk appetite could be vulnerable to a correction.

US stock market snapshot

Meta shares fell 3% on Monday and have shed 53% in the last year.

Apple Inc (NASDAQ: AAPL) shares lost 2% on Monday and have slid 18% in the last year.

Alphabet shares slid 2.74% on Monday and have tumbled 28% in the past year.

McDonalds shares dropped 0.58% on Monday but have climbed 4.41% in the last 52 weeks.

General Motors shares shed 4.37% on Monday and have slumped 31% in the last year.

Caterpillar shares fell 1.11% on Monday but have soared 29.74% in the past year.

The United Parcel Service share price lost 2.81% on Monday and has slid 12.48% in the last year.

Meanwhile, the S&P 500 Index has shed 11% in the last year, while the Dow Jones has lost 4% in a year and the Nasdaq Composite has shed nearly 20% in the past 12 months.

The post What to watch on the US stock market this week: ANZ appeared first on The Motley Fool Australia.

It's not often anyone gets to outdo the legendary Warren Buffett at investing.

After all, Buffett has an unrivalled six-decade investing career, which he has used to build his company Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) from relative obscurity to the US$693 billion behemoth it is today. Giving himself a net worth of US$110 billion in the process, of course.

Yet, like all of us, Buffett is only human. As such, he does make mistakes from time to time. I'm sure one of his biggest mistakes was passing up on Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) stock. Alphabet is the US tech giant that owns Google.

It is one of the most successful companies of all time, giving investors a 3,270% return since its 2004 IPO (that's 17.2% per annum compounded).

Yet neither Buffett nor Berkshire owns this company. Nor has Buffett or Berkshire ever owned it.

Buffett never bought Alphabet stock. Should we?

Alphabet's Google is one of the most dominant companies on the planet. It has near-total dominance in the global search engine business, only ceding ground where it has been completely barred from participating in a market, as has happened with China.

But Google also dominates in other areas too. It owns the Android smartphone operating system, which is by far the most used system globally. Other Alphabet apps like Google Maps, Translate, and YouTube are also among the world's most popular.

Quite simply, Alphabet has one of the widest and deepest moats of any company anywhere. And yet Buffett, who coined the term 'moat' himself, has never owned it.

To be fair, some aspects of Alphabet's business would be hard for a nonagenarian to get their head around. And Buffett has come out before and waxed lyrical about his love of the company and regret in not buying it:

But even though Buffett has never bitten the bullet on Alphabet, that doesn't mean we can't. And right now might be the perfect time to consider an investment.

Be greedy when others are fearful

Alphabet stock has had a pretty shocking year. In early 2022, Alphabet's Class A stock hit a high of US$151.55. Today, it is going for just US$91.29, a fall of almost 40%:

This leaves the company on a pretty compelling valuation, in my view. One that hasn't happened for Alphabet in a decade.

At present, Alphabet's Class A stock has a price-to-earnings (P/E) ratio of 18.48. That means investors are being asked to pay $18.48 for every $1 of earnings.

By comparison, the ASX's Commonwealth Bank of Australia (ASX: CBA) has a P/E ratio of 19.7 right now. Woolworths Group Ltd (ASX: WOW) is sitting at a P/E ratio of 26.88.

Yes, by this metric, CBA and Woolies shares are more expensive than Alphabet stock. I know which company I would rather own for the next decade and beyond! So perhaps now is the time to do what Buffett did not, and buy Alphabet shares.

The post Alphabet stock: A once-in-a-decade opportunity to outdo Warren Buffett? appeared first on The Motley Fool Australia.

If you were asked what your biggest investment mistake was, you'd likely think of a stock that almost shrunk to $0.

But one expert reckons that would not be your biggest error.

US financial expert Brian Feroldi, in his Long-Term Mindset newsletter, revealed some of the startling mistakes he and his fellow commentators have made over the years.

"In 2009, Brian Stoffel sold Alphabet Inc (NASDAQ: GOOGL) for a split-adjusted US$10 per share. He's missed out on 820% returns — a mistake costing tens of thousands of dollars," said Feroldi.

"In 2007, Brian Feroldi sold DexCom Inc (NASDAQ: DXCM) for a split-adjusted US$2 per share. He's missed out on 5,800% returns — a mistake costing hundreds of thousands of dollars."

Those are painful enough, but the third error was a whopper.

Brian Withers sold Netflix Inc (NASDAQ: NFLX) shares in 2010 for a split-adjusted US$20.

"He missed out on 1,500% returns. Because it was his largest position, this mistake cost him millions of dollars."

Loss aversion

What do these massive mistakes have in common?

They were all bad selling decisions rather than buying errors.

And the same motivator was behind the sale of all three shares — loss aversion.

Loss aversion is the psychological phenomenon that sees humans trying a lot harder to protect what they have than to gain the same amount.

"Stoffel sold Google because he couldn't believe that he'd made a quick thousand dollars. Feroldi wanted to lock in a small profit while he could," said Feroldi.

"Withers — sitting on 20-bagger returns — was worried about losing all he'd gained."

Look at the business, not the stock

According to Feroldi, each expert was so anxious about losing capital that "we lost sight of what actually mattered".

That's the long-term potential of the businesses.

So the three Brians are urging all long-term investors to learn from their mistakes and do exactly that.

"If we had looked at the businesses instead of the stocks, we'd likely have stayed put," said Feroldi.

"Holding great companies for long periods of time isn't easy. But, selling a future mega-winner early is one of the most costly investing mistakes that you can make."

The post How to avoid the biggest mistake in investing: expert appeared first on The Motley Fool Australia.

ASX shares are having a top day of gains so far this Thursday. At present, the S&P/ASX 200 Index (ASX: XJO) has risen by a healthy 0.85% all the way up to just under 7,350 points. But those gains look rather small in comparison to what's happening with the BetaShares NASDAQ 100 ETF (ASX: NDQ).

This index-tracking exchange-traded fund (ETF) is rocketing in value today. BetaShares NASDAQ 100 ETF units are currently enjoying a 2.78% surge in value, lifting the fund up to $27.38 per unit.

So what's behind these pleasing rises this Thursday?

Why is the BetaShares NASDAQ 100 ETF surging in value?

Well, the BetaShares NASDAQ ETF is an index fund that tracks the NASDAQ-100 (NASDAQ: NDX) over in the United States. The NASDAQ 100 is an index that tracks the 100 largest shares on the NASDAQ stock exchange, excluding certain financial companies.

The NASDAQ is well known for being the home of most of the top tech shares on the US markets. Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) and Tesla Inc (NASDAQ: TSLA) all call the NASDAQ home. As you can tell by their ticker codes.

So as goes the performance of the NASDAQ 100 Index, so goes the BetaShares NASDAQ 100 ETF.

And lo and behold, the NASDAQ 100 had a stellar night last night in US trading. The iIndex finished the session up a rather extraordinary 4.58% to back over 12,000 points.

That's a two-and-a-half-month high. These gains were spurred by the likes of Apple rising close to 5%, Alphabet soaring more than 6%, and Tesla rocketing an incredible 7.67%.

So the BetaShares NASDAQ ETF was always going to have a cracking day. Why isn't it rising by 4.58% like its index, though?

Well, the BetaShares NASDAQ ETF houses assets priced in US dollars. But it is quoted in Australian dollars. Thus, currency movements affect its value, alongside the value of its underlying shares.

And while the US markets rocketed overnight, so too did the Australian dollar. A higher Aussie dollar means that US shares become less valuable in Australian dollar terms. So hence the more muted gains we have seen with the ETF.

Nevertheless, there's no doubt investors are very happy with this ETF today.

The post Why is the BetaShares NASDAQ 100 ETF (NDQ) having such a stellar run today? appeared first on The Motley Fool Australia.

Every so often, a company comes along and has so much success that many investors end up retiring millionaires by simply going along for the ride. Apple (NASDAQ: AAPL) is one of those companies. The tech giant has seen success matched by very few in history, and it has been rightfully earned. After all, it has world-class products, top-tier brand loyalty, and a bank account that other companies can only dream of having.

Past results are great, but a company's future outlook should be driving investing decisions. And although it's the largest public company in the world with a market cap of over $2.4 trillion -- more than Amazon, Berkshire Hathaway, and Tesla combined -- there's still room for noticeable growth for Apple.

Here's why it's a must-own for 2023.

Apple is just getting started in the finance industry

Apple first began its journey into the financial services space in 2014 with the announcement of Apple Pay, which allowed people to pay from their iPhones. However, this move was seen as more about convenience than Apple making its way into the space. Then came 2019 and the announcement of the Apple Card -- a sign Apple was clearly taking a step in that direction.

With the Apple Card, Apple relied on Goldman Sachs to approve applications and fund the loans, which is why when they announced Apple Pay Later -- their move into the buy now, pay later space -- it was no longer a mystery whether Apple was serious about becoming a player in the financial services industry. Apple Pay Later is the first time Apple is underwriting and funding loans by itself.

Apple has an advantage that no other financial institution can duplicate: Its iPhone is in more than 100 million hands in the US. Between the iPhone's world-class technology and the convenience it can provide, the company's play into the financial services space is bound to test even the most formidable of financial technology (fintech) competitors.

The iPhone still reigns supreme

The iPhone is arguably the greatest consumer product ever made; it has quite literally changed the world. Apple reportedly spent over $150 million developing the original iPhone, and to say they've reaped the returns on their investments would be the understatement of the century. In its 2022 fiscal year, Apple brought in $394.3 billion in revenue -- roughly $28.5 billion more than it did in 2021. The iPhone accounted for more than half of that, bringing in $205.4 billion.

The fact that the iPhone managed to increase its sales in a year defined by inflation not seen in decades is very telling of its power. In fact, this year was the first time ever that more people in the US used an iPhone than an Android phone. That's a remarkable milestone when you consider the iPhone's market share growth and much higher price point.

As long as the iPhone is padding Apple's bottom line, there's no reason to believe it won't continue to be one of the biggest cash cows you'll see from any business in any industry.

Apple is ramping up its research and development

Apple has historically spent a smaller portion of its revenue on research and development (R&D) than its other Big Tech competitors like Alphabet and Amazon. In 2020, here's how much the three companies spent on R&D and the percentage that was of their net sales:

• Alphabet: $27.6 billion (15%)
• Amazon: $42.7 billion (11%)
• Apple: $18.8 billion (7%)

In 2021, Apple's R&D budget increased to $21.9 billion, and in 2022, it jumped up to $26.2 billion -- a company record. Although this still represents a relatively low percentage of Apple's revenue, it's a sign the company isn't getting complacent and is putting more emphasis on taking advantage of potential growth opportunities.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is Apple a must-own US stock in 2023? appeared first on The Motley Fool Australia.

As 2022 starts to close, it's only natural for investors to start peeking toward 2023. So far in 2022, the indexes have fared pretty miserably, with the Nasdaq-100 down 29% and the S&P 500 down 17%. Which one will have a better 2023?

Let's look at these indexes and their makeups and find out which is more likely to have a better 2023 ahead.

The indexes are highly concentrated on the top

At the top, the indexes have a lot of overlap.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

As you can see, Apple, Microsoft, Amazon, and Alphabet make up a considerable chunk of these indexes. In the S&P 500, they account for 19.83%. It's basically double for the Nasdaq-100, with that group making up 39.16% of the index. It's pretty straightforward: How these companies do will significantly steer how the overall index does.

While these three are tech-focused, they compete in different markets. Both Apple and Amazon are a good measure of the pulse of the consumer, as their sales are highly affected by consumer sentiment. If inflation cools, and consumers don't need to worry about rising grocery prices or housing costs, they may treat themselves to the latest device.

Alphabet and Microsoft are business-focused, but for different reasons. Alphabet's primary revenue stream is advertising, and many clients have pulled back their spending levels in 2022 due to the uncertain business environment. If the outlook improves, expect this revenue to return. Microsoft's cloud business and Office product suite indicate how willing businesses are to spend on their infrastructure, but Microsoft's consumer product division also indicates how individuals are doing. 

If the consumer gets stronger and business outlook improves, these four will boom. If that's the case, then the Nasdaq-100 will likely have a better year because it is concentrated in companies that will benefit the most. But if 2023 brings an economic recession, the S&P 500's diversity will help it to outperform the Nasdaq-100.

The companies outside the top five are very different

For the S&P 500, when you move out of the top five, the companies become much more diverse.

Data source: Slickcharts. Data as of Nov. 19.

Now, there are industrials, healthcare, and energy sectors represented, giving the index some much-needed balance. Looking at the top 20 reveals even more diversity, with financials, energy, and healthcare rounding the index out.

This is far from the case for the Nasdaq-100.

Data source: Slickcharts. Data as of November 19. Note: Both Alphabet class shares combined.

Besides Pepsi and Costco, these companies are more in the tech sector. But, unlike the S&P 500, it doesn't get much better outside the top 10, with most of the top 20 consisting of chipmakers, communication companies, and software businesses. Now, this probably isn't a surprise because the media often refers to this index as the "tech-heavy Nasdaq."

Still, tech businesses don't do well if the economy is struggling.

Does that mean you should write the Nasdaq-100 off? Absolutely not. Tech stocks tend to do very well in the recovery phases of a recession. Plus, the stock market is forward-looking, and stocks usually tend to do better during a recession than leading up to one.

That last tidbit of information should keep investors in the market, especially now with a recession, or at least an economic slowdown, imminent. However, if you're trying to decide which index to buy, you need to utilize the 2023 outlook. If you think 2023 will be a repeat of 2022, then the S&P 500 is the better choice. On the other hand, if you believe the economy will begin to recover and the Federal Reserve eases its interest rate hikes, then the Nasdaq-100 is the place to be.

One last point: There's nothing wrong with owning both indexes if you don't know what 2023 will bring. Personally, I think this is an intelligent strategy, as it gives investors the upside of recovery and the safety of a balanced investment.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will the Nasdaq or S&P 500 have a better 2023? appeared first on The Motley Fool Australia.

What happened

FAANG stocks Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Netflix (NASDAQ: NFLX) jumped today after the October Consumer Price Index report showed inflation cooling off faster than expected.

According to the Bureau of Labor Statistics, consumer prices jumped 7.7% year over year in October, below expectations of 7.9%, and the October reading marked the slowest year-over-year growth rates since January. On a monthly basis, inflation was up 0.4%, below expectations of 0.6%.

Core inflation, which excludes more-volatile food and energy prices, was also lower than expected, rising just 0.3% from September and 6.3% over the last year.

The news makes it more likely that the Federal Reserve will slow the pace of its interest rate hikes, leading Treasury yields to plunge while stocks rallied on the news. Rising interest rates make bonds more attractive by comparison, but falling rates tend to attract money out of bonds and into stocks. 

As of 11:20 a.m. ET on Thursday, Alphabet stock was up 7.1%, while Meta had gained 7.2%, and Netflix was 5.6% higher. At the same time, the Nasdaq had jumped 5.8%, and the 10-year Treasury yield fell 7.5% to 3.85%, its lowest point in a month. 

So what

All three of these FAANG stocks are sensitive to consumer spending and, therefore, inflation and interest rates. They also make much of their money from outside the U.S., and falling Treasury yields weakened the dollar, which fell 2% against a basket of currencies this morning.

Alphabet stock has dropped sharply over the past year on concerns over a slowing economy and possible recession. The business' performance has taken a hit from macroeconomic headwinds, with revenue growth slowing to just 6% in its third quarter, or 11% in constant currency.

Advertising is a cyclical business, and it's generally one of the first expenses that businesses pull back on when they sense that demand is slowing or they need to cut costs. With inflation falling faster than expected, the bottom of the economic cycle could arrive sooner than investors had thought, which would be good news for Alphabet's Google since it's the leading digital advertising business.

Facebook parent Meta Platforms has faced similar headwinds, with its revenue shrinking in its most recent quarter. The company noted macroeconomic challenges in its most recent earnings report, but competition from TikTok, as well as Apple's ad-targeting restrictions, are also impacting its growth.

In a clear sign of the challenges the company faces, yesterday it laid off 11,000 employees, or 13% of its workforce. Meta has also been spending aggressively on its metaverse project, and investors might be more permissive of that spending if they believe interest rates will soon peak, since the cost of losing that money, measured by the net present value, goes up as interest rates increase.

Lastly, Netflix is a consumer-driven business whose subscription model makes it less sensitive to the macro-level economy than consumer discretionary companies that depend on one-time purchases, like restaurants and travel busineses. However, competition has increased significantly in video streaming, and higher prices are likely to cause some consumers to reconsider their streaming budget.

Netflix also has $14 billion in debt, some of which it's likely to roll over in the coming years, so lower interest rates are to its advantage there. It's also launching its advertising tier this month, and a recession could hurt momentum in that new business.

Now what

Of the three of these stocks, Alphabet seems the most sensitive to the macro climate as the digital advertising leader, and its performance -- especially for Google Search -- is something of a bellwether for the overall economy.

Meta is currently struggling with cash burn from its metaverse project and competition in its ad business. But the stock has become so cheap that a shift in market sentiment would give it some much-needed momentum to recover. 

And Netflix's future will mostly be determined by the success of its new ad tier and its ability to win against a wide range of streaming options. But the stock would still be better off if the global economy can avoid a recession.

All three stocks should benefit if inflation continues to cool off, but Meta and Netflix face more-immediate challenges that investors will be watching closely.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why FAANG stocks were soaring today appeared first on The Motley Fool Australia.

Appen Ltd (ASX: APX) shares are up 2% in morning trade, having opened 2.5% higher.

This will come as welcome news to shareholders in the beleaguered artificial intelligence data services company.

Appen shares have come under heavy selling pressure this year alongside some of its biggest customers and revenue earners, like Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc (NASDAQ: META).

Or Google and Facebook, to you and me.

The Meta share price is down a whopping 71% this calendar year, while Alphabet's shares have plunged 39%.

Little wonder then that the Appen share price has also been in freefall.

But there may be a light at the end of the tunnel for the ASX tech stock's shareholders.

Why the picture could be getting brighter

With Appen's share performance significantly impacted by the outlook for the big US tech stocks, Julian Emanuel, senior managing director at Evercore ISI, offers a fairly bullish forecast.

Emanuel said investors shouldn't conflate this year's tech woes with the dotcom-bubble burst in 2000, indicating the tech sector will rise again.

According to Emanuel (quoted by Bloomberg), "This is not like 2000. Over the last 10 years we have gotten to this point where the returns were driven by a handful of stocks."

The handful of stocks in question include Meta and Alphabet, part of the so-called giant tech FAANG stocks. (Though with the Facebook and Google name changes, the proper acronym would now be MAANA, not quite as catchy.)

Emanuel said the FAANG (or MAANA) stocks are likely to trade in a tight range from here until "earnings catch up to valuations".

"Long-term, those are still secular growers; they're just not going to prop up the market to the extent that they have," he said, in what could prove to be good news for Appen shares down the road.

How have Appen shares been tracking?

Appen shares are down a painful 77% in 2022. For some context, the All Ordinaries Index (ASX: XAO) is down 10% year to date.

The post Could this imply light at the end of the tunnel for Appen shares? appeared first on The Motley Fool Australia.

Shares of Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) moved in opposite directions after their latest earnings reports. Apple's stock jumped nearly 8% on Oct. 28 after it soundly beat Wall Street's expectations, but Alphabet's stock tumbled 9% on Oct. 26 after it broadly missed analysts' expectations on both the top and bottom lines.

Apple's stock has still declined 12% this year as of this writing, but Alphabet fared much worse with a 34% drop. Let's see why Apple outperformed Alphabet by such a wide margin and if it will remain the better bear market buy.  

The key differences between Apple and Alphabet

Apple generated 79% of its revenue in its latest quarter by selling iPhones, iPads, Macs, and other hardware products and accessories. The remaining 21% came from its Services business, which houses its App Store and subscription-based services. It ended fiscal 2022 (which ended in September) with over 900 million subscribers across all of its services.

Alphabet generated 79% of its revenue in its latest quarter from Google's advertising business, which houses the ads from its core search engine, its advertising network, and YouTube. The rest of Alphabet's revenue came from Google's Cloud platform (10% of its revenues), its subscription-based services, hardware products, and other smaller businesses.

Apple's hardware business faced supply chain constraints throughout the first nine months of fiscal 2022, but that pressure eased in the fourth quarter. It was also affected by intermittent COVID-19 lockdowns in China, but its sales in the Greater China area (19% of its fiscal 2022 revenue) still increased nearly 9% for the full year.  

Alphabet's main challenge is the slowdown of the digital advertising market. Its ad sales had recovered quickly from the pandemic in 2021, but inflation, rising rates, and other macro headwinds all caused companies to buy fewer ads this year. YouTube, which suffered its first year-over-year revenue decline last quarter, also struggled to keep pace with ByteDance's TikTok in the short video market. Google's Cloud business continued to grow, but it couldn't fully offset its slower ad sales.

Which tech giant is growing faster?

Apple's revenue rose 33% to $365.8 billion in fiscal 2021, driven by robust sales of the iPhone 12 (its first family of 5G devices), while its EPS surged 71%. Its growth cooled off in fiscal 2022 as it lapped those 5G upgrades and it faced persistent supply chain headwinds, but its revenue still increased 8% to $394.3 billion as its EPS rose 9%. Analysts expect its revenue and earnings to grow 4% and 5%, respectively, this year.

Those growth rates might not seem impressive, but they don't factor in any new devices -- including its long-rumored AR (augmented reality) headsets -- or services that Apple might launch in 2023. Apple ended fiscal 2022 with $169 billion in cash and marketable securities, so it could still easily expand into new markets with big investments and acquisitions.  

Alphabet's revenue rose 41% to $257.6 billion in 2021 as its advertising business posted a strong post-pandemic recovery. Its EPS also increased a whopping 91%. But in the first nine months of 2022, its revenue only grew 13% year over year to $206.8 billion (and decelerated throughout all three quarters) as its EPS declined 14%. Analysts expect its revenue to rise 10% this year but for its earnings to decrease 15%.

That slowdown can be entirely attributed to the market's softening demand for digital ads. Its overseas revenues are also being gobbled up by a strong dollar, which could continue to strengthen as interest rates continue to rise. Nevertheless, analysts expect Alphabet's revenue and earnings to grow 9% and 14%, respectively, as some of those headwinds dissipate.

Alphabet ended the third quarter with $22 billion in cash and equivalents, which also gives it ample room for fresh investments and acquisitions. But for now, Alphabet plans to rein in its spending until its core advertising business recovers.

The valuations and verdict

Apple's stock outperformed Alphabet's this year because its core business seemed more resistant to the macro headwinds. But at 24 times forward earnings, Apple's stock looks a bit pricey relative to its near-term growth. Alphabet trades at just 17 times forward earnings, but that lower valuation suggests that investors aren't too optimistic about its future. 

I own both of these stocks, and I think they're still great long-term investments. But if I had to buy more shares of one of these stocks right now, I'd pick Apple instead of Alphabet because its near-term growth is more predictable, it's better insulated from the macroeconomic headwinds, and it's widely expected to roll out new products and services -- which the market probably hasn't fully priced in yet -- in 2023 and beyond. Alphabet's stock might seem cheaper, but it probably won't command a higher valuation until the broader digital advertising market recovers. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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But the Vanguard International Shares ETF is also one of the most diversified funds available, with close to 1,500 individual shares within its underlying investment portfolio. So how can investors know whether this extremely wide fund is a good investment, containing high-quality companies?

Well, let's have a look at how it is actually structured.

How is the Vanguard International Shares ETF built?

So although the Vanguard International Shares ETF holds close to 1,500 different companies, it is actually a very top-heavy ETF. As it turns out, its top five holdings alone account for approximately 15% of the ETF's entire portfolio by weighting.

Let's examine the largest companies in the Vanguard International Shares ETF and see what kind of quality we are getting here

The fund's top holding is Apple Inc (NASDAQ: AAPL), a company that needs little introduction. For one, it's hardly debatable that Apple has one of the strongest brands in the world. But the company can also boast a very stable financial position.

Apple started paying a consistent dividend back in 2012 and has increased its dividend every single year since. Even so, it is still only paying out 14.7% of its earnings as dividends today. That indicates immense financial strength to me.

The next holding in the Vanguard International Shares ETF is Microsoft Corporation (NASDAQ: MSFT), another company that most investors would know well. Chances are most of us use a Microsoft product or service every day, which is a good start.

But Microsoft also has a formidable financial position. This company has a much-envied 17-year streak of growing its annual dividends. It has a higher, but still impressive, dividend payout ratio of 27.4% of earnings today.

More quality companies?

The Vanguard International Shares ETF's next three top holdings are Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), and Tesla Inc (NASDAQ: TSLA).

Here's where things get interesting. Unlike Microsoft and Apple, these companies do not pay dividends at present.

So both Alphabet (parent company of Google) and Amazon shares have had a rough time of late, thanks largely to disappointing earning reports.

However, in Alphabet's case, the company still reported US$69.1 billion in revenue and US$13.9 billion in net income. For the quarter. It also announced that it still has US$116 billion in cash, cash equivalents, and marketable securities on its balance sheet. With almost absolute dominance in the global search market, it's hard to argue that Alphabet isn't still a top-tier company.

Turning to Amazon, this company reported US$127.1 billion in net sales for the quarter, which was up 15% year on year. Amazon is also a household name with a formidable scale and brand. The fact it can still grow its revenue by double digits when it is at 12 figures is enough to call it a quality company in my view.

Tesla might be the most divisive name in the Vanguard International Shares ETF's portfolio. But there's no denying the fact that it is the world leader in electric vehicle manufacturing and battery technology.

Its rise to become one of the largest companies in the world in only a few years is also almost unprecedented. Yet this is a company that still reckons it will increase its production rate by 50% this year.

So, all in all, I think the top five companies in the Vanguard International Shares ETF are of the highest quality. You don't climb to the top of the global companies pile with mediocrity after all.

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Earnings disappointments tend to bring not only stock selling but also longer-term doubts about a stock. And investors learned from Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) recent third-quarter earnings report that even mega caps are not immune from such negative sentiment.

Nonetheless, doubts about stocks like Alphabet should serve as a reminder to look at a company more closely. Do the concerns about Alphabet mean investors should close positions or buy shares at the new, lower price? 

Alphabet's third-quarter earnings

Admittedly, this earnings report is one both shareholders and the company will want to forget. Third-quarter revenue of $69.1 billion fell slightly short of the $70.6 billion forecast by analysts. Also, the $13.9 billion net income, or $1.06 per share, came in well below the $1.25 per share consensus.

Additionally, both YouTube and the Google Network experienced a revenue decline of around 2% over the last 12 months. Amid these swoons, overall ad revenue rose by 3%, and company revenue increased by 6% over the same period.

Still, this lags behind the 41% yearly revenue growth reported in the third quarter of 2021. Not surprisingly, the stock price dropped following the news. The latest decline means the stock has fallen by about 30% over the last 12 months.

What to make of the report

Alphabet described the business climate as "uncertain" on the earnings call and, indeed, no investor should characterize the results as good news.

However, the situation also calls for some perspective. First, ad-market competitors such as Meta Platforms have experienced the same sluggishness in the ad market. This confirms the uncertainty Alphabet mentioned on the earnings call.

Moreover, Alphabet recognized years ago that it needed to develop sources of revenue outside of advertising. To that end, it bought numerous companies in various parts of tech. This includes Calico and Verily Life Sciences in the biotech fields, autonomous car company Waymo, artificial intelligence company DeepMind, and numerous others.

Admittedly, investors may be frustrated that the company does not generally release financials for these segments. One might also think the diversification away from advertising has moved too slowly. In the third quarter of 2015, advertising claimed 90% of Alphabet's revenue. By the third quarter of 2022, it had only fallen to 79%.

Still, one of the few non-ad segments it reports, Google Cloud, made up 10% of company revenue in Q3. Additionally, Google Cloud revenue grew 38% year over year, so that portion will likely continue to increase.

Don't forget a key fundamental

Investors also need to remember Alphabet's ace in the hole: liquidity. At the end of Q3, the company reported more than $116 billion in cash, cash equivalents, and marketable securities.

That has fallen from about $140 billion at the end of last year. Still, it leaves the company with considerable resources to find new revenue resources without having to incur rising borrowing costs.

Also, Alphabet has generated $44 billion in free cash flow in the first nine months of the year. That slightly decreased from the $48 billion in the first three quarters of 2021. Nonetheless, it leaves Alphabet in a strong cash position that can ensure the company's future.

The state of Alphabet

The third-quarter earnings report does little to change Alphabet's value proposition. Admittedly, headwinds in the digital ad market have finally caught up with Google. However, the slowing growth likely speaks to the economic cycle more than Alphabet. That leaves room for recovery as conditions improve.

Moreover, the success of Google Cloud has reduced Alphabet's dependence on ads. Alphabet's tech businesses, massive liquidity position, and free cash flow could further diversify revenue sources over time. Thus, investors probably want to look at this report as a buying opportunity for the communications stock rather than a cause for panic.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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While tech stocks were hammered in 2022, the cloud computing industry barreled along at an impressive growth rate. According to research firm Gartner, the public cloud sector alone is estimated to grow 20% this year.

This amounts to nearly half a trillion dollars in 2022. Just a decade ago, global public cloud computing revenue was a mere $26.4 billion.

Given the cloud industry's rapid expansion, competitors abound. Among the bigger players are tech giants IBM (NYSE: IBM) and Google Cloud, owned by Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).

Both are seeing strong growth in their respective cloud businesses. But if you had to choose between the two, which company offers the better investment opportunity? Let's dig into each to arrive at an answer.

IBM's cloud strategy

IBM spent the past few years reinventing itself into a hybrid cloud-focused company. In a hybrid cloud implementation, a business employs both public and private clouds, using the former to perform basic IT infrastructure tasks, such as hosting a corporate website, and the latter to secure confidential or critical data, including financial and customer records.

IBM was smart to focus on this area. The hybrid cloud market is forecasted to grow from $85.3 billion last year to $262.4 billion by 2027.

In addition, IBM's impressive list of enterprise clients is an ideal fit for hybrid cloud solutions. Big Blue's customers include the top ten banks, governments, and healthcare companies in the world. These industries need the security of a private cloud while capturing the cost savings of a public one.

IBM's hybrid cloud strategy proved successful. In its third-quarter earnings report, IBM generated revenue of $14.1 billion, a 6% increase over 2021. This is the third consecutive quarter of year-over-year revenue growth despite macroeconomic headwinds, such as a strong U.S. dollar.

Big Blue also offers an attractive dividend, yielding about 4.8% at the time of this writing. The company can maintain this robust dividend thanks to its free cash flow (FCF). IBM expects to hit $10 billion in FCF this year, while dividend payments totaled about $6 billion over the trailing 12 months.

IBM has a strong dividend track record, paying consecutive quarterly dividends since 1916. It also raised its dividend in April, marking 27 consecutive years of dividend increases.

Alphabet's Google Cloud approach

Alphabet is building its Google Cloud business in the same way it generated success for its famed Google search engine: by prioritizing customer acquisition and revenue growth over profitability.

That's why Google Cloud is currently unprofitable, exiting the third quarter with an operating loss of $699 million. But its business is growing rapidly. In just three quarters this year, Google Cloud's sales nearly matched all of 2021's income, continuing a multi-year streak of rising revenue.

Data source: Alphabet. YOY = year-over-year.

Google Cloud comprised only about 10% of Alphabet's Q3 revenue, but it's already ranked the third-biggest cloud computing company behind industry leaders Amazon and Microsoft. And Alphabet continues to aggressively invest in Google Cloud despite closing down other bets such as its Stadia video games division.

For instance, Alphabet acquired cybersecurity firm Mandiant in September for $5.4 billion, marking one of the company's biggest acquisitions in its history. Mandiant will boost Google Cloud's security in a world where remote workers grew from 23% of the American workforce before the coronavirus pandemic to nearly 60% in 2022.

Is IBM or Alphabet the better investment?

Both IBM and Alphabet have proven successful in their cloud endeavors, so investing in either is worthwhile. After all, the cloud computing industry is forecasted to grow from $706.6 billion last year to $1.3 trillion by 2025.

But if I had to choose one of these cloud computing companies to invest in, I would lean toward Alphabet despite IBM's success and attractive dividend.

Google Cloud's revenue is already edging past Big Blue. IBM's hybrid cloud revenue over the past 12 months totaled $22.2 billion. Google Cloud's revenue was $24.5 billion over the same time period.

Granted, Google Cloud's success can be overshadowed by Alphabet's digital advertising business, which accounted for $54.5 billion of its $69.1 billion in Q3 revenue. And the advertising industry is experiencing a downturn this year, leading Alphabet's Q3 ad revenue to increase just 2.5% year-over-year.

But Alphabet's ad business helps fund Google Cloud. Alphabet generated $63 billion in FCF over the past 12 months, while IBM expects to achieve a cumulative FCF total of $35 billion across three years, from 2022 to 2024.

Also, Alphabet possesses several factors, along with Google Cloud, that make the company an alluring investment, including its dominance in search advertising. Alphabet increased revenue 41% year-over-year in 2021, and its revenue continues to grow this year, reaching $206.8 billion over three quarters compared to $182.3 billion last year.

Google Cloud's strong growth, Alphabet's hefty FCF, and the company's other areas of strength provide compelling reasons to make Alphabet the better choice for an investment in the rapidly rising cloud computing industry. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Coming into Alphabet Inc's (NASDAQ: GOOG) (NASDAQ: GOOGL) third-quarter earnings report on Tuesday night, there were already signs that growth would be sluggish.

Fellow digital advertising stock Snap Inc said revenue growth slowed to just 6% in its third quarter, and Alphabet management had already warned about macroeconomic uncertainty in its second-quarter earnings report.

Those fears were validated when the Google parent posted third-quarter results that were even worse than expected.  

Revenue increased just 6%, or 11% in constant currency, to $69.1 billion and ultimately missed estimates at $70.6 billion. On the bottom line, operating income fell 19% to $17.1 billion, and earnings per share shrank from $1.40 in the quarter a year ago to $1.06 (below the analyst consensus of $1.25). The stock fell 6.6% in the after-hours session on Tuesday night. 

Advertising screeches to a halt

While Google Cloud and the projects in the "other bets" segment, like the autonomous driving service Waymo, get some attention from investors, Alphabet is fundamentally an advertising business, and advertising makes up essentially all of its profits, as Google Cloud and other bets lose billions of dollars each year.

Google Search still drives a majority of the company's revenue and profits, making it the biggest determinant of the company's success.

In the third quarter, revenue from the search segment increased just 4.3% to $39.5 billion, while YouTube's top line fell for the first time since the company broke out its results, declining 2% to just over $7 billion. Revenue at Google Network, which is made up of Google ads on non-Google properties, also fell 1.6% to $7.9 billion.

Management noted that the stronger dollar was partly responsible for the weak growth and said that lapping rapid growth in the quarter a year ago when overall revenue jumped 41% was the main reason for the underwhelming performance.

However, Alphabet's overall revenue also declined sequentially, and advertising revenue slipped 3.2% from Q2 to $54.5 billion, a clearer sign that macroeconomic headwinds are weighing on the business.

On the earnings call, the company said it saw a pullback in verticals, including financial services like insurance, loans, and crypto, and that negative trends in ad demand strengthened from the second quarter to the third quarter.

Is this a red flag?

Advertising is a cyclical business, and in uncertain economic environments like the current one, it's often one of the first expenses that businesses cut back on, which makes sense. Companies anticipating a decline in consumer spending are likely to cut back on marketing, and digital advertising in particular can be easily ramped up or down according to demand. Cutting ad budgets also doesn't come with the baggage that laying off employees or slashing capital expenditures does.

Alphabet management seems to expect the headwinds to get worse before they get better. The company doesn't give guidance, but it said it expects stronger currency headwinds in the fourth quarter and plans to slow spending growth in the fourth quarter and in 2023, which should help shore up the profit decline.

After headcount jumped 25% to 187,000 year over year in the third quarter, CEO Sundar Pichai promised that employee additions would be significantly slower in the fourth quarter and in 2023. In Q4, the company plans to add less than half the new employees it did in Q3.

As a public company, Alphabet has been through two advertising cycles before. Both times, in the financial crisis and the coronavirus pandemic, advertising growth fell sharply but quickly rebounded as the economic climate improved, and that should be the case again. 

Google's advertising products are essential tools for a wide range of businesses, and it has a near monopoly on search, with around 90% in market share in the countries where it operates. Despite the decelerating growth, this is not a broken business by any means. 

Investors should expect slow growth over the next few quarters, as ad demand is likely to be weak, but Alphabet's strengths are still intact. Furthermore, the stock is reasonably priced at a price-to-earnings ratio of roughly 20 based on this year's estimates.

If the bear market persists, the stock could decline further, but for a dominant business and a profit machine, this isn't a bad entry point at all.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The S&P/ASX 200 Index (ASX: XJO) looks set to end its recent winning streak if this Friday's session so far is anything to go by. At the time of writing, the ASX 200 has shed 0.55% and is back down to around 6,810 points. And, as is often the case, ASX tech shares are leading the plunge.

Many ASX tech shares are shedding value significantly this session.

There's Xero Limited (ASX: XRO), nursing a 2.41% loss. Altium Limited (ASX: ALU) is down by 3.15%. Appen Ltd (ASX: APX) has lost 2.29%. BrainChip Holdings Ltd (ASX: BRN) is taking the cake with a nasty 16.24% slide, although it has a poorly-received quarterly update to blame for that.

So why are ASX tech shares seemingly getting singled out by the markets today?

Why are ASX tech shares copping such a hammering?

Well, we don't know for sure. But there have been a few developments over the past few days that could explain why ASX tech shares are feeling the pinch.

Overnight on the US markets, tech shares were also drummed. The NASDAQ-100 (NASDAQ: NDX) fell 1.88% last night. Since the NASDAQ is known as the tech-heavy index, its moves can often influence the performance of ASX tech shares in subsequent sessions.

But we also heard from a couple of US tech shares as well. First up was Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), parent company of Google. On Wednesday, Alphabet reported its latest quarterly numbers.

And they were not pretty. As we went through yesterday, analysts were reportedly expecting earnings per share (EPS) of US$1.26. Instead, Alphabet reported EPS of just US$1.06.

Revenues and margins were also lower than expected. Not exactly a good sign for the global economy, given Alphabet's dominance of the international advertising market. Alphabet stock fell more than 9% on this news.

So that sent shivers through the markets at the time. But then we heard from Amazon.com Inc (NASDAQ: AMZN) last night, the north star of tech shares the world over.

Amazon also reported its quarterly earnings overnight (our time). And again, it wasn't a pretty picture. Amazon also missed expectations on revenue and put out a lower-than-expected guidance for the current quarter. Amazon shares lost more than 4% last night, and another 12.7% in after-hours trading.

Not exactly a strong base for our own ASX tech shares to build off today. So this could well be why ASX tech shares are having such a clanger.

The post Why are ASX 200 tech shares getting bashed around today? appeared first on The Motley Fool Australia.

What happened

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the world leader in online advertising, released its third-quarter financial report after the market closed Tuesday, and the results were disappointing. Furthermore, these results were seen as a harbinger of what's to come for the rest of the digital advertising industry.

As a result, many adtech and digital advertising stocks fell in sympathy on Wednesday, as investors considered what was to come. Shares of The Trade Desk (NASDAQ: TTD) and Meta Platforms (NASDAQ: META) slumped as much as 8.1% and 5.5%, respectively, while Amazon (NASDAQ: AMZN) and Roku (NASDAQ: ROKU) had fallen as much as 4.8% and 3.9% respectively. As of 1:59 p.m. ET, the quartet was down 3.9%, 5.1%, 3.9%, and 2.9%, respectively.

This sell-off was broad based, taking down a wide variety of companies that rely on digital advertising for their livelihood. Earlier this year, Google's ad revenue seemed largely immune to the recessionary fears that gripped much of Wall Street. It's well documented that advertising is among the first items in corporate budgets to be slashed in times of economic uncertainty, and it seems that reality has finally caught up with the digital advertising kingpin.

So what

In the third quarter, Alphabet reported revenue of $69.1 billion, which grew just 6% year over year. Foreign currency headwinds played a part, as revenue would have been up 11% in constant currency. For context, revenue in the prior-year quarter grew by 41%.

The pressure on the top line also dented profits, as earnings per share (EPS) of $1.06 declined 24%. Analysts' consensus estimates had called for revenue of $71 billion and EPS of $1.26, so Alphabet failed to clear either bar.      

However, commentary by the company sent investors running for the exits, as management detailed several factors that will weigh on results for the coming quarter. Alphabet cited tough comps, worsening foreign exchange headwinds, and lower ad spending as companies shore up their financial positions in the face of growing economic uncertainty.

As a result of the disappointing results, analysts issued a flurry of price target reductions, with no fewer than 14 of Wall Street's finest cutting their expectations. JMP Securities analyst Andrew Boone seemed to capture the prevailing mood, saying the results were a warning sign that digital advertising this quarter will likely be weaker than originally imagined. 

Bernstein analyst Mark Shmulik echoed those sentiments, writing, "Google is an ad business first, and digital ads [are] no longer a safe place to hide."  

Now what

Alphabet's results seemed to suggest the writing is on the wall for the rest of the digital advertising and adtech space. That said, investors shouldn't be too quick to jump ship but rather assess the potential for each of these companies on their own merit.

Meta Platforms leads the social media space and is widely regarded as the other company in the Google/Facebook duopoly that dominates much of the digital advertising space. Given the similarities in their business models and Meta's reliance on digital advertising for more than 97% of its revenue and all of its profits, the comparison is an appropriate one. After that, however, the contrasts become more pronounced.

Amazon derives the lion's share of its revenue from e-commerce and cloud computing, though in recent years, digital advertising has been one of the company's fastest-growing businesses. Amazon's advertising services revenue grew 20% so far this year but still represents just 7% of the company's total revenue, so the sell-off in this case is likely related to the state of the broader economy and the potential to slow growth in its e-commerce and cloud segments.

Roku is an interesting one. Investors inexorably link the company with its namesake streaming devices, but many are unaware that Roku derives the majority of its revenue from the digital advertising that appears on its streaming video platform. Alphabet said that digital ads on YouTube, the company's streaming platform, declined 2% year over year, the first such decline since Alphabet began reporting the platform's results in 2019. This could spell trouble for Roku in the coming quarters.  

Finally, there's The Trade Desk. The company's adtech platform places digital ads across a wide spectrum of online locations, acting as a go-between for some of the world's largest ad agencies.

When The Trade Desk released its second-quarter report in early August, the results were surprisingly robust. Revenue grew 35% year over year, while adjusted EPS climbed 11%. At the time, CEO Jeff Green made a startling pronouncement, saying (emphasis mine), "This trend also gives us confidence that we will continue to gain market share in any market environment."  

The Trade Desk is seen as a striking alternative to advertising in the walled gardens offered by Google, Facebook, and Amazon. It also has one of the highest valuations, a function of its consistently strong results and entrenched position in the industry. While the stock may yet feel the impact of the economic downturn, The Trade Desk is still my top pick among these digital advertising and adtech stocks. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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What happened

Shares of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) turned sharply lower on Wednesday, falling by  9.14%.

The catalyst that sent the tech giant lower was its third-quarter earnings report, which suggested the economy is worse than some feared.

So what

Alphabet generated revenue of $69 billion, up 6% year over year (up 11% in constant currency), as foreign currency headwinds ate into its results. Its operating margin continued the decline that began earlier this year, falling to 25% compared to 32% in the prior-year quarter. The bottom line showed the strain of the beleaguered economy as diluted earnings per share (EPS) of $1.06 slumped 24%.

To give some context to that performance, analysts' consensus estimates were calling for revenue of $71 billion and EPS of $1.26, so Alphabet missed expectations on both counts.

In the face of macroeconomic headwinds, Google Cloud held up relatively well, growing 38% year over year, bringing its run rate to nearly $27.5 billion. But the big story was a marked deceleration in Google's digital ad revenue, which grew just 2.5%.

Ad spending on YouTube exhibited the most noticeable change, as revenue declined to $7.07 billion, down 2% year over year and missing analysts' expectations of $7.42. This marks the first time YouTube's ad revenue declined year over year since Alphabet began breaking out the segment's results in 2019.

On the conference call to discuss the results, CFO Ruth Porat blamed the decelerating growth on "further pullbacks in advertiser spend," a phrase that sent a shiver through the digital advertising and ad-tech spaces.

Now what

Heading into the fourth quarter, Alphabet executives warned that the company was "lapping the outsized growth in 2021," resulting in tough comps, while simultaneously facing "larger" foreign exchange headwinds and a pullback in ad spending.

Over the long term, its industry-leading position in digital advertising makes Alphabet stock a buy -- particularly on any weakness -- but investors should buckle in for a bumpy ride over the next few quarters. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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1) Overnight Tuesday, Wall Street rose for a third straight day on a combination of strong corporate earnings and falling bond yields. Excerpt from Bloomberg…

Investors still expect the Fed to raise rates by three-quarters of a percentage point during its meeting next week. But recent economic data is already showing that Fed tightening has started to weigh on the US economy, leading investors to speculate that the central bank may be approaching the end of its aggressive tightening campaign. This renewed expectation of less hawkishness from the Fed, as well as a better-than-expected earnings season so far, have pushed stocks higher in recent days.

2) Earnings from Coca-Cola and General Motors topped estimates. But the wheels fell off after the market close, with Google parent Alphabet missing earnings estimates and fellow tech-giant Microsoft reporting a disappointing revenue forecast.

In after-market trading, both the Alphabet share price and the Microsoft share price fell more than 6%.

It was only yesterday when I said "earnings risk" might usurp the risk of higher interest rates as the dominant driver of equity markets. 

Most of the heavy lifting has already been done on interest rates. Although there's a lag, the desired effect – a slowing of economic growth – is starting to show up in corporate results. If Alphabet and Microsoft are feeling it, you can bet your bottom dollar companies with much less of a competitive advantage will be paddling upstream.

This bear market rally may be about to run out of steam.

3) Turning to Australia, the ASX 200 is largely flat in afternoon trade, at first following Wall Street's lead higher, then falling back after Q3 headline inflation jumped to an annual rate of 7.3%, higher than expectations.

Naturally, Australian bond yields rose as talk of the RBA raising interest rates by 50 basis points on Melbourne Cup day came back into play. That said, according to the Australian Financial Review, interbank futures are implying only a 25% chance of the RBA hiking by 50 basis points. 

Markets have been hanging on the prospect of central banks slowing their rate of interest rate increases. For the time being, inflation is winning the battle, with equities, despite their recent bounce, coming a long second.

4) Speaking of earnings risk, one of today's victims is Codan Ltd (ASX: CDA), the company best known for its gold metal detectors.

The Codan share price is being taken to the woolshed today after it forecast a significant contraction in first-half sales at its dominant Minelab division. Here's what the company said:

Like many businesses we are operating under challenging market conditions, with geopolitical issues, a high inflationary environment and an increasing risk of global recession. The risk of declining sentiment may impact sales in the short term and management continues to monitor this risk closely.

The company expects sales for Minelab to be in the region of $75 to $80 million in the first half of FY23, compared to $138 million in the prior corresponding period. The reduction primarily relates to the disrupted nature of the African market, normalisation of sales as we transition to living with COVID…

Codan joins a long line of COVID beneficiaries – government stimulus in some African countries was seemingly spent on buying gold detectors – turned post-COVID flops. 

Codan shares are now down 80% from their June 2021 high. Ouch.

5) One of the other high profile COVID boom-to-bust stocks is Kogan.com Ltd (ASX:KGN). 

Unlike Codan, the Kogan share price is on the rise today despite reporting first-quarter gross sales falling 38.8%, cycling a quarter in the prior year that was heavily impacted by COVID-19 lockdown orders, a period when online retailers saw booming sales.

Investors today were buoyed by Kogan accelerating the sale of its final excess inventory, with the ever-optimistic Ruslan Kogan saying he does not believe the first quarter trading result is indicative of its projected trading performance.

Inflation and rising interest rates are putting pressure on households across Australia and New Zealand. It's in the Kogan.com DNA to obsess over delivering the most in demand products and services at the best possible prices. We know that during periods of belt tightening like this, our responsibility to be the best place for Aussies and Kiwis to get a bargain on their key household items is more important than ever.

Good luck to Mr Kogan and his Kogan.com business. Kogan.com shares have fallen 86% from their October 2020 peak, although they have bounced almost 30% higher off their July 2022 low.

Whilst Kogan does indeed compete on price, it's not the only discount retailer on the web. And when belts are being tightened, replacement cycles for cheap TVs and the like just might blow out a little.

6) The consumer discretionary stock I'm playing for the coming economic slowdown is Best & Less Group (ASX: BST). 

50% of its sales are in the baby and kids market. As children grow, they need bigger clothes, so there is a repeat purchase element to the business. 90% of its items sold retail for less than $20 and their average selling price is a modest $8.33.

Best & Less is profitable, has net cash on its balance sheet, and pays an attractive fully franked dividend.

Best and Less shares trade on eight times earnings with a fully franked dividend yield of 9.5%. Whilst not immune to an economic slowdown and having formidable competitors in the likes of Big W and Kmart, there does appear to be a decent level of downside protection for Best & Less shareholders.

The post The bear market rally has seen the ASX 200 jump five percent higher in October. It could all be about to run out of steam appeared first on The Motley Fool Australia.