Interactive Investor

US tech results preview: Tesla, Meta Platforms, Microsoft, Google

It’s a huge week for the American technology sector, which could determine direction for months ahead. Will stocks follow Tesla lower or is the AI trend still going strong?

23rd April 2024 15:47

by Graeme Evans from interactive investor

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Earnings updates by four of Wall Street’s Magnificent Seven will provide another big test of tech sector valuations after last week’s retreat by NVIDIA Corp (NASDAQ:NVDA) and other semiconductor stocks.

Tesla Inc (NASDAQ:TSLA), Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT) and Google owner Alphabet Inc Class A (NASDAQ:GOOGL) are forecast to report either a deceleration of earnings growth or lower year-on-year performances in this week’s quarterly results.

But what will matter most for Wall Street is how their performances impact the artificial intelligence (AI) capital expenditure outlook, particularly after recent headwinds for semiconductor stocks.

Shares in AI chipmaker Nvidia reversed 13.6% last week as Europe’s ASML Holding NV (EURONEXT:ASML), which produces the equipment needed to make the most advanced microchips, came up short of expectations in terms of first-quarter orders.

Combined with geopolitical and interest rate worries, the tech sell-off meant the S&P 500 index experienced its worst weekly performance since March last year and the tech-heavy Nasdaq slid 5.4% in its largest weekly decline since November 2022.

UBS Global Wealth Management believes Friday’s reverse, which included a 10% fall for Nvidia, was largely due to technical factors such as monthly option expiries.

It added: “Recent results suggest that AI chip demand overall remains strong and growing.

“While we shall closely monitor this week’s earnings for additional details on AI monetisation and capital expenditure trends, we maintain a positive view on the theme, and continue to favour the semiconductor and software segments.”

About 35% of the S&P 500 index are reporting this week, making the outcome pivotal to the overall success of the earnings season and for the progress of the wider US market.

Some 72 S&P 500 companies equivalent to 21% of index earnings had reported up to the end of last week, with the 6% earnings per share beat largely driven by financial stocks.

The earnings growth of the Magnificent Seven, which also includes Apple Inc (NASDAQ:AAPL) and Inc (NASDAQ:AMZN), is expected to slow to 39% year-on-year from 63% in the fourth quarter.

The other 493's earnings are expected to show a further decline of 4%. But analysts at Bank of America sees this as the trough and that the growth differential with the big seven will close by the fourth quarter, potentially leading to a rotation out of Tech and into more value-oriented stocks.

It expects the AI contribution to the results of Meta Platforms after Wednesday’s closing bell and those of Google owner Alphabet and Microsoft on Thursday night will be a key focus.

However, the bank adds that the AI capital expenditure outlook will be equally as important as 2024 marks the first year of what could be a multi-year AI investment cycle.

Semiconductor firms will be the biggest beneficiaries, but the bank also highlights the impact on AI infrastructure companies in the areas of power, construction and commodities.

The Magnificent Seven results season will get off to a downbeat start tonight as analysts expect Tesla to report its first revenues decline since the pandemic and a significant earnings fall of 10% as multiple price cuts erode profitability.

The shares have fallen 9% in the week leading up to the results and by 18% in the past month. Tesla recently announced plans to lay off 10% of its global workforce as higher-for-longer bond yields continue to weigh on demand and drive up input costs.

Saxo’s head of equity strategy Peter Garnry is negative tactically on the technology sector, warning of the dangers that highly valued Nvidia could experience a similar fate to Tesla.

While demand for AI chips remains strong and the outlook for Nvidia looks good, Garnry said equities are about changing expectations.

He wrote this week: “As we have recently told clients, Tesla’s plunge from its late 2021 high of more than 65% reflect forces that were not adequately priced in the valuation.

“The market back then priced Tesla for 25-30% global market share domination including sustaining higher operating margin than the industry. Two years later competition is eroding Tesla’s profit margin and demand has hit an air pocket.”

On Nvidia, he said the biggest risks looked to be increased competition, supply chain disruptions around Taiwan and electricity production that cannot keep up with AI data centre demand.

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