The Tipping Point for Big Tech is Here

Tech earnings season is here, and with the sector flying high, investors will be looking for reasons to stay bullish after a blockbuster first half.

Over the next two weeks, five of the largest companies in the technology sector will report June quarter results that will set the tone for the year’s second half. Numbers from Microsoft (MSFT), Alphabet (GOOGL) and Meta Platforms (META) are due the first week, followed by Apple‘s (AAPL) and Amazon.com‘s (AMZN) reports the next week. 

With all five stocks boasting fat year-to-date gains, the risk is that even small disappointments on results or guidance could trigger a round of profit-taking. A few key technology companies checked in ahead of the big guns, and the early signs are troubling. 

Netflix (NFLX), for instance, is off 10% since its recent earnings report. While the streaming video company posted much higher growth in subscribers than the Street had expected, revenue growth and guidance both disappointed investors.

German software giant SAP (SAP) slumped 6% after its June quarter results missed estimates as some customers remained conservative about spending on IT. The chip equipment company ASML (ASML) dipped after providing cautious commentary, citing “continued macroeconomic uncertainties.” Taiwan Semiconductor (TSM) shares fell after the contract chip manufacturer saidresults continue to be hurt by weak sales of mobile phone and PCs, plus high inventories at customers.

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 has rallied 43% this year, mostly due to investors’ enthusiasm about its position in artificial intelligence software. Shares surged a few days ago after the company announced higher-than-expected pricing for AI-based “Copilot” software for its suite of office applications. There isn’t much AI revenue yet at Microsoft, but any commentary about the technology’s future impact on the business could boost the shares further.

Meanwhile, investors will be looking for signs that a recent slowdown in growth in the company’s Azure cloud computing business is bottoming. Here, too, demand for AI-related processing will be a factor. 

The offset will be the continuing weakness in PC demand, which affects the company’s Windows and device businesses. One wild card will be any signs that the AI-powered Bing chatbot is gaining market share from Google in the internet search market.

Alphabet: The company is the parent of Google and YouTube, so its results will provide important clues on the health of the online advertising market. Recent Wall Street commentary has suggested that online ad spending has improved in recent months, potentially setting Alphabet up for a solid earnings beat. 

As with Microsoft, AI has played an important part 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 is also some fear on the Street that rival AI chatbots like ChatGPT and Microsoft Bing will eat into Alphabet’s dominance in search and that the investment required to build AI software capability will boost capital spending.

Another factor will be the growth outlook for the company’s cloud computing business. The company reports the same day as Microsoft, another player in cloud computing.

Meta Platforms: The parent of Facebook, Instagram, WhatsApp, and now Threads has had a big year, with the stock soaring nearly 150%. Much of that reflects the company’s “year of efficiency” push to bring down costs, which has included more than 20,000 job cuts. 

Analysts see signs that Meta’s advertising business is improving as it finds ways to route around issues created in recent quarters by Apple’s privacy push for iPhone users, which made targeting harder. Investors also will be looking for signs of better monetization at Reels, the company’s TikTok clone. Another key will be commentary on how the company plans to make money from its considerable work on AI large language models. 

And what about the metaverse? CEO Mark Zuckerberg was once so enamored with virtual reality that he renamed the company, but there has been little chatter on that front in recent months. 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 reports its earnings on Wednesday.

Apple: Shares of Apple have rallied 48% this year, boosting its market cap to more than $3 trillion. But the business’s fundamentals have been soft. 

Revenue this quarter is expected to be down slightly from a year ago, amid a weak market for both handsets and personal computers, though an easing of supply constraints could mean higher profit margins. Investors will be looking to the company’s services business to offset a tougher market for consumer hardware. 

The next turns in the Apple story will likely involve future products. That includes the iPhone 15 launch this fall, the debut of the Vision Pro mixed-reality headset in early 2024, and potentially a push into the AI chatbot market in competition with Bing, Bard, and ChatGPT. 

The wild card for Apple might involve geography. The company’s close ties to China, which accounts for nearly 20% of sales, carry considerable risk. Apple reports results on Aug. 3.

Amazon.com: Amazon shares have soared 55% this year, driven by optimism about improving performance from both the Amazon Web Services cloud business and its flagship online store. 

Like the cloud businesses at Microsoft and Google, AWS has seen growth slow in recent quarters from customers “optimizing” their cloud spending. But the view on the Street is that the process is nearing completion and that the emergence of the generative AI will accelerate demand in the quarters ahead.

Meanwhile, ebbing inflation and solid consumer spending data bode well for online shopping. The company’s ad business should benefit from firming spending, as will Meta and Alphabet. 

A point to watch is any updates on Amazon’s own plans for AI products. The company already is developing LLMs, and offering a suite of tools for AI software to AWS customers. Amazon also reports Aug. 3.


Originally published on Barrons.com

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