Tech earnings season has arrived, and with the sector booming, investors will be looking for reasons to remain optimistic after a successful first half.
Over the next two weeks, five of the biggest tech companies will release June quarter results that will set the tone for the second half of the year. Numbers of
Microsoft
(symbol: MSFT),
Alphabet
(Google T
Metaplatforms
(META) are expected in the first week, followed by
Apple
(AAPL) and
Amazon.co.uk
‘s reporting next week.
With all five stocks posting big gains year-to-date, the risk is that even small disappointments in earnings or forecasts could trigger a series of profit-taking. A few key tech companies arrived before the big guns, and the early signs are troubling.
netflix
(NFLX), for example, is down 10% since its recent earnings report. While the streaming video company saw subscriber growth well above what the street had expected, the revenue growth and forecast both disappointed investors.
German software giant SAP (SAP) fell 6% after its June quarter results missed estimates as some customers remained cautious about IT spending. Chip equipment company ASML (ASML) fell after providing cautious comments, citing “continuing macroeconomic uncertainties”.
Taiwan semiconductor
(TSM) fell after the contract chipmaker said results continued to be hurt by weak cellphone and PC sales, as well as high customer inventories.
Here’s a look at the key issues for each of the big five tech companies:
Microsoft: There are three major factors at play for Microsoft, which reports results on Tuesday. The company is up 43% this year, largely due to investor enthusiasm for its position in artificial intelligence software. Shares jumped days ago after the company announced higher-than-expected prices for AI-based “Copilot” software for its suite of office applications. There isn’t a lot of AI revenue at Microsoft yet, but any commentary on the technology’s future impact on the business could boost shares even further.
Meanwhile, investors will be looking for signs that a recent growth slowdown in the company’s Azure cloud computing business is bottoming out. Here too, the demand for AI-related processing will be a factor.
The offset will be continued weakness in PC demand, which is affecting the company’s Windows and peripherals businesses. A wildcard will be any sign that the AI-powered chatbot Bing is gaining market share from Google in the internet search market.
Alphabet: The company is the parent company of Google and YouTube, so its results will provide important clues about the health of the online advertising market. A recent commentary from Wall Street suggested that online ad spending has improved in recent months, potentially setting Alphabet up for a solid revenue run.
As with Microsoft, AI played a big role in the stock’s 36% rally this year, so investors will be eager for updates on how the company sees the trend unfolding. But there’s also some fear on the street that rival AI chatbots like ChatGPT and Microsoft Bing are eating away at Alphabet’s dominance in search, and that the investment needed to build AI software capability will increase capital expenditure.
Another factor will be the growth prospects for the company’s cloud computing business. The company reports on the same day as Microsoft, another cloud computing player.
Metaplatforms: The parent company of Facebook, Instagram, WhatsApp and now Threads had a great year, growing nearly 150%. Much of that reflects the company’s “efficiency year” push to cut costs, which included more than 20,000 job cuts.
Analysts are seeing signs that Meta’s advertising business is improving as it finds ways to circumvent problems created in recent quarters by Apple’s privacy policy for iPhone users, which has made targeting more difficult. Investors will also be looking for signs of better monetization at Reels, the company’s TikTok clone. Another key will be a commentary on how the company plans to make money from its extensive work on big AI language models.
And what about the metaverse? CEO Mark Zuckerberg was once so enamored with VR that he renamed the company, but there has been little talk about it in recent months. Last but not least, the street will be eager for an update on Threads, the company’s new Twitter competitor, and any plans to start selling ads there.
Meta publishes its results on Wednesday.
Apple: Apple shares have risen 48% this year, taking its market capitalization to more than $3 trillion. But the company’s fundamentals have been weak.
Revenue this quarter is expected to be slightly lower than a year ago, in a weak market for handsets and personal computers, although an easing of supply constraints could mean higher profit margins. Investors will look to the company’s services business to offset a tougher market for consumer hardware.
The next turning points in Apple’s history will probably concern future products. This includes the launch of the iPhone 15 this fall, the debut of the Vision Pro mixed reality headset in early 2024, and potentially a push into the AI chatbot market competing with Bing, Bard and ChatGPT.
The wild card for Apple could involve geography. The company’s close ties to China, which accounts for nearly 20% of its sales, carry considerable risks. Apple publishes its results on August 3.
Amazon.com: Amazon shares have soared 55% this year, buoyed by optimism about improved performance of Amazon Web Services’ cloud business and its flagship online store.
Like the cloud businesses of Microsoft and Google, AWS has seen slow growth in recent quarters as customers “optimize” their cloud spend. But the street view is that the process is coming to an end, and the emergence of generative AI will accelerate demand in the coming quarters.
Meanwhile, lower inflation and strong consumer spending data bode well for online shopping. The company’s advertising business should benefit from stronger spending, as should Meta and Alphabet.
One thing to watch out for is any updates to Amazon’s own plans for AI products. The company is already developing LLMs and offering a suite of tools for AI software to AWS customers. Amazon also reports August 3.
Write to Eric J. Savitz at eric.savitz@barrons.com