Shareholders in Apple ( NASDAQ:AAPL ) and Amazon.com ( NASDAQ:AMZN ) didn’t have a great earnings season, as both companies fell around 2% the day after their respective third quarter reports. Those drops also came on the heels of year-to-date underperformance from each stock relative to the S&P 500 — a rare off year for each.

So have these two juggernauts run out of steam? Not likely. In fact, both stocks were down much more immediately after the reports before recovering some of Friday’s losses. That’s probably because as investors dove into the details around each report, they were likely to find a big silver lining for each. Amazon’s cloud computing strength helped offset retail weakness. Image source: Getty Images. Amazon: Headwinds in retail, but cloud computing is taking off

Amazon missed on both revenue and earnings estimates, and its Q4 guidance came in below expectations as well. The core retail business is currently plagued by supply chain and labor shortages, which are hurting not only on the revenue side but also on the cost side. This was also the first full quarter since vaccines were widely available, and U.S. consumers clearly began to venture outside for shopping more and more.

Against difficult comparisons, Amazon still posted year-over-year growth in its online stores, which were up 3%, and third-party seller services were up 18%. But labor shortages caused signing bonuses to rise, and Amazon is also continuing to build a massive amount of capacity as it looks to complete its one-day delivery project begun in 2019. That caused earnings to decline by about half relative to last year.

But performance at Amazon Web Services was a huge plus. While the e-commerce business still accounts for most of Amazon’s revenue, AWS is arguably Amazon’s most valuable business because of its high profit margins and high growth. Last quarter, AWS posted fantastic numbers: Revenue accelerated 39%, up from 37% growth in the second quarter and 29% in the year-ago quarter. AWS operating margins also expanded by two percentage points over the prior quarter to 30.3%, showing impressive operating leverage.

So while Amazon’s headline numbers came in below expectations, AWS strength may actually be more important to the stock’s overall value. Amazon is also using AWS profits to fund its one-day and same-day delivery buildouts. Once that project is completed and supply and labor shortages ease in 2022 or 2023, e-commerce should bounce back as well.

With AWS looking stronger than ever and the e-commerce problems likely to be temporary, Amazon’s lagging stock should rebound in time. Apple customers are using more and more services. Image source: Getty Images. Services are the Apple of this investor’s eye

Meanwhile, Apple’s “miss” also masked some very good news in the important services segment. Overall, Apple missed on revenue, while earnings per share were in line with expectations.The culprit was supply chain disruption, not demand, as CEO Tim Cook outlined $6 billion in unfulfilled revenue resulting from manufacturing disruptions from COVID in Asia, followed by chip shortages for certain hardware items. Adding $6 billion back to revenue would have handily beat expectations, as overall revenue only missed by about $1.5 billion.

Underlying strength was boosted by the burgeoning services division, which grew 25.6% year over year, ahead of expectations, while all of Apple’s hardware categories except iPads missed expectations. Services strength is a huge plus, as that revenue tends to be recurring in nature, as opposed to hardware sales, which are prone to cyclical ups and downs .

Not only does services strength portend steadier growth ahead, but it also shows Apple’s success expanding its brand to new areas, such as streaming TV, with Ted Lasso sweeping this year’s Emmys, to payments, fitness and health, games, and other areas of consumer spending.

So while Cook warned that the fourth quarter would also be affected by the supply chain to an even greater degree, Apple’s brand appears as strong as ever. That means demand should bounce back once shortages are fixed in 2022 or 2023, and over the longer term, Apple’s brand extensions into various services should produce nice incremental growth as well. Amazon and Apple investors should hold tight

While both Apple and Amazon disappointed this quarter and may very well disappoint in the December-ending quarter, too, both brands seem as strong as ever, even as supply and labor shortages outside management’s control weigh on current numbers.

If weakness in their shares continues, Foolish long-term investors may want to consider picking up more of these premier large-cap tech names for the long haul. Should […]

source Huge Silver Linings Underneath Amazon and Apple Earnings “Disappointments”

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