Amazon, Google rewarded for cutting back costs

Investors have started to reward Internet companies that can show both financial discipline and a path to long-term growth, making Amazon.com and Google the clear winners of the technology earnings season.

Google kept costs in check in the second quarter, and shareholders cheered with a 16 percent stock gain after the search giant released better-than-expected results. Amazon also surged after posting a surprise profit, demonstrating that the web retailer is capable of making money when it puts a brake on spending.

“Internet investors are focused more on growth in users and revenue,” said Paul Sweeney, an analyst at Bloomberg Intelligence.

“Amazon is the best example of this investor mindset. However, whenever a company throttles back its expenses and drives profits, as Amazon and Google did this quarter, investors are pleased and drive the stock higher.”

By contrast, Facebook, which vowed to keep its brisk pace of investments to lure users and advertisers, fell as CEO Mark Zuckerberg was short on details about money-making plans for the company’s newer initiatives, like WhatsApp and Oculus. LinkedIn and Twitter slumped over concerns that user growth is slowing. Microsoft Corporation posted its largest-ever quarterly loss. And Apple failed to meet analysts’ predictions for iPhone sales and growth for the current quarter.

“The second quarter was very much a mixed bag,” Sweeney said.

Technology companies in the Standard & Poor’s 500 Index beat analysts’ earnings estimates at a 71 percent pace so far in the season, data compiled by Bloomberg show. The rate is lower than for the entire S&P 500 Index - at 74 percent - with notable misses including Yahoo and Oracle

“The big players in digital advertising are winning, which are Google and Facebook,” said John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, who helps oversee more than $2 billion. “They’re doing very well. A lot of the smaller digital companies are not doing well.”

Google’s shares surged after CFO Ruth Porat signaled plans to bring more restraint to spending at the Internet search giant.

“The priority is revenue growth,” Porat said on a conference call after the report, her first at Google.

“We have a breadth of opportunity, but pursuing revenue growth is obviously not inconsistent with expense management.”

For Amazon, a day of sales on July 15 to mark the company’s 20th anniversary, called Prime Day, exceeded expectations. The promotion, designed to drive Prime membership sign-ups, generated orders surpassing Black Friday, the annual U.S. sales event that kicks off the year-end holiday shopping season. Revenue for the company’s cloud-services business rose 81 percent year over year, and 49 percent from the previous quarter.

On the cost side, operating expenses grew slower than sales, rising 17 percent to $22.7 billion, Seattle-based Amazon said.

Spending on marketing and fulfillment centers were unchanged as a percentage of sales compared with a year earlier, according to Brian Olsavsky, Amazon’s chief financial officer.

Facebook reported second-quarter revenue that beat analysts’ estimates, but investors were disappointed by the growth of the company’s applications that could be making billions on their own.

The focus for the three apps - WhatsApp, Instagram and Messenger - was still on expanding their communities, Zuckerberg said.

Bloomberg