The story of corporate America during the just-concluded third quarter of 2020 was not much different from what we saw in the second quarter. There was a small, encouraging turn, however.
Executives of some of the US companies hardest hit by the pandemic were more hopeful about the future as they saw the economic recovery begin to take hold. As measured by their success in exceeding expectations they set for themselves, about 84% posted earnings per share that exceeded estimates. The performance was the best since FactSet started tracking the metric in 2008.
As the stay-at-home winners – major tech companies and retailers – continued their victories, some of the biggest losers during the pandemic also showed some signs of recovery.
Let's focus first on the two iconic US brands whose revenues were adversely affected by the pandemic as COVID-19 forced consumers to interrupt their restaurant visits and the government shut down closing theme parks: Starbucks Corporation (NASDAQ 🙂 and Walt Disney Company (NYSE :). As each reported their third-quarter earnings, both surprised markets with a better-than-expected showing, suggesting that the worst is likely over.
The coffee giant reported that worldwide sales at the same store fell 9% in the period ending September, but that performance was better than the 11.9% decline analysts had expected. While that marks the third straight of total declines, the size of the drops has declined since spring, when much of the world was locked. In the US, comparable store sales declined by 9%, exceeding expectations.
Disney, which is suffering unprecedented losses, that quarantine has accelerated a shift to its streaming business at a time when cinemas and theme parks remain abandoned and TV production has come to a halt. Disney had approximately 74 million subscribers to the streaming video app Disney + on October 3, up from more than 60 million reported in August.
"The real bright spot was our direct-to-consumer business," Disney executive Bob Chapek said in a Wall Street Journal report, referring to the division that encompasses the company's streaming business.
Investors, on the other hand, look quite optimistic about the post-pandemic recovery, pushing Disney stock to pre-pandemic levels. Shares closed at $ 143.90 on Wednesday, down 0.42% on that day.
Tech Giants Earnings Momentum Still Strong
In the past quarter, tech giants continued to reap the benefits of their unique position during the pandemic, driving demand for everything from online retail and social media to cloud computing services and digital advertising.
Amazon.com (NASDAQ :), Alphabet (NASDAQ 🙂 and Facebook (NASDAQ 🙂 all reported strong quarterly sales and earnings. Amazon, which had record sales in the second quarter of the year, again exceeded expectations with an increase of 37% and profits nearly tripled, driven by strong online sales and digital advertising and growth in its lucrative cloud computing arm.
Google's parent company also recovered in its digital ad segment after some weakness during the first two quarters of the year.
The latter weren't so encouraging for Apple (NASDAQ :), whose profits fell after the world's most valuable company delayed the launch of its new flagship iPhone due to the pandemic.
Together, the five largest tech companies by value – Apple, Amazon, Alphabet, Facebook and Microsoft (NASDAQ 🙂 – achieved sales that were 18% higher in the last quarter than a year earlier.
Bottom Line
The underlying strength of the third quarter earnings season explains why stocks have recovered so strongly from the pandemic slump and why investors are optimistic about the future outlook, even though valuations remain extremely wealthy.
