From BIG Tech earnings results so far, what seems clear is that if a company smashes through expectations like Alphabet (GOOG) did, the stock will climb. If, however, you merely match expectations like Meta Platforms (META) and Microsoft (MSFT) then shares retreat.
Amazon’s (AMZN) earnings report on Thursday, October 24, will start the Big Tech Earnings Parade off with a bang. Wall Street analysts are expecting the company to report earnings of $1.14 a share for the third quarter. That would be up from 85 cents a share in the third quarter of 2023. That would be a 34% jump in year over year earnings. Which would certainly be a great lead in to earnings from Alphabet (GOOG), Apple (AAPL), Microsoft (MSFT) and Meta Platforms (META) the following week.
Microsoft (MSFT) raised its quarterly dividend by 10% and unveiled a new $60 billion stock-buyback program, matching the size of a repurchase plan three years ago. Shares were up as much as 2.4% today, September 17, before closing ahead 0.87%.
Remember the good old days–say, 2023–when all you had to do was slap AI in the name of a company and the stock would soar? I kept waiting for AI Burgers made from AI cows, or AI Shoes, which used AI machine learning algorithms to tell you what size shoe you needed. This investor embrace of all things AI led to the fear that there was an AI-stock market bubble that would send the entire stock market into a very painful bear market when it broke. The appetite for AI stocks is still huge–witness the rebound in Nvidia (NVDA) shares that added $400 billion to the stock’s market cap in a four-day recovery from the “sky-is-falling, we’re-headed-to-a-recession stock market retreat. But this stock market still has a big AI problem. We will find out how big when Nvidia reports earnings after the close tomorrow, August 28. Here’s the problem: Most AI companies aren’t making money.
Earnings, earnings, earnings. From members of the Magnificent 7: Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META) and Apple (AAPL). in the consumer sector from consumer stocks Starbucks (SBUX), McDonald’s (MCD), Mastercard (MA).From drug companies Pfizer (PFE), Moderna (MRNA) and Merck (MRK). And from Big Oil Chevron (CVX), ExxonMobil (XOM), Shell (SHEL), and BP (BP). Here’s what I’d watch for.
I expect technology sector weakness to continue with earnings worries still unanswered. What could put an end to selling in tech stocks? The NASDAQ 100 is down almost 4% in the last week. Certainly earnings news that showed earnings growth at the companies in this sector robust enough to justify paying a premium for these shares would be a big help Unfortunately, the coming week isn’t going to bring enough earnings good news among tech shares to make this case. Among big tech stocks only Tesla (TSLA) and Alphabet (GOOG) are scheduled to report.
Today’s Quick Pick is Cloud Service Infrastructure Stocks. Normally I’ll choose a specific individual stock for Quick Picks but in this case, I thought I should highlight the entire sector. It’s impossible to overstate the importance of AI technology’s effect on the economy as a whole but it’s also important to look at the individual companies and sectors that benefit from the demand this technology brings to the market. AI has created a revival of growth in the cloud service infrastructure sector, as demand for more processing on databases to run AI programming continues to increase. The sector has seen a revenue growth of about 21% year over year in the first quarter of 2024. The sector is dominated by three companies with Amazon (AMZN) holding the largest share at 31%, and Microsoft (MSFT) with 24% and Alphabet (Google) (GOOG) with 11.5%. This is a $300 billion market, and those three companies have about 66% of it. Smaller players like Alibaba (BABA) and Oracle (ORCL) have A LOT smaller shares at 4% and 3%. However, even that 3% of the market puts Oracle’s cloud revenue at $5.1 billion in the most recent quarter. Revenue in this sector is likely to continue to grow and it looks like good news for all of these companies that set the tone for the market. This is yet another way to get in on the AI boom.
Today’s video is Microsoft Shows Priced to Perfection Risks. This quarter, the company reported Tuesday,  Azure, its cloud services flagship, grew revenue by 30% last year. While a 30% growth rate would be a great for many companies, Wall Street and analysts were disappointed in this news from Microsoft. This is the “priced to perfection” problem. Although the company beat earnings estimates, beat revenue estimates, and showed 30% growth in a key part of the company, the stock went down. Maybe a $3 trillion market cap on Microsoft is a lot of weight to push up hill. We could see more of this during this earnings season as Amazon, Apple and Meta release their own reports. The “Magnificent Seven” that were responsible for most of the 24% gain in the S&P in 2023 are beginning to wobble. My hope was for more market leaders to emerge but that doesn’t seem to be happening. I don’t expect “wobble” to cause anything that terrible in the market, but a sideways move is likely as investors ponder their next move.
It is perhaps too early to draw meaningful conclusions, but Microsoft’s failure to jump in after-hours trading on better than expected earnings sure seems like more evidence that this is a market priced to perfection.
Here are the first 8 picks for my GREATER Growth Stocks Special Report. More on the way.
Hedge funds are unwinding some of their overweight positions in technology stocks after their concentration in the sector reached record levels, according to Goldman Sachs. Net selling in tech, media and telecom stocks last week was the most since July, Goldman Sachs wrote in a note today. Information Technology (XLK) and Communication Services (XLC) were the most net sold sectors, Goldman said. And, among subsectors, sales of software stocks, chips and chip equipment and interactive media and services “were by far the most net sold.” The outweighed buying in IT services and media.”
On Monday Nvidia (NVDA) hit an all-time high. For 2023 through November 17, Nvidia and the other 6 stocks in the Magnificent Seven–Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Tesla (TSLA)–have gained more than 70%. The other 493 stocks in the Standard & Poor’ 500 are up 6% for that same period.
