Earnings season is coming, and it’s going to be a tricky one.
Tech stocks came out of the gate roaring in 2023, with the
Nasdaq Composite
rallying 32% over the year’s first six months. But the group’s momentum is gone, with the same index down 1% since June 30.
The issues start with the Federal Reserve, whose tightening cycle has extended beyond Wall Street’s expectations. Meanwhile, the early mania over generative artificial intelligence has become more nuanced in the second half. Following the initial hype, there are concerns about the economics of AI, which involves non-trivial investment in pricey processors and other hardware, with an uncertain payoff.
Those AI investments now threaten the “year of efficiency” margin improvements that
Meta Platforms
(ticker: META) and other tech firms have been touting. It’s all unfolding amid new worries about the near-term prospects for corporate IT spending.
Here are the key issues to watch as tech earnings begin to roll in.
Pressing Pause:
Netflix
(NFLX) kicks off the earnings parade Wednesday. Investors will again be focused on the progress of its password-sharing program, its still-nascent advertising-supported subscription tier, and the lingering effects of the labor actions in Hollywood, where actors remain on strike, even after a settlement by writers. This past week Morgan Stanley analyst Benjamin Swinburne trimmed his price target on the streaming pioneer to $430, from $450, writing that consensus estimates “reflect too much, too quickly from password sharing and advertising.”
Budget Crunch: There have been high hopes that IT budgets will loosen as 2024 gets under way. But Piper Sandler analyst James Fish says a recent survey of more than 30 tech resellers shows signs of trouble.
“After a few quarters of improvements, spending trends were weaker than previously seen and IT budgets have been further pressured. That likely sets up for relatively capped ’24 spending,” Fish writes in a research note. We’ll get some IT spending clues when
IBM
(IBM) reports later this month.
Rally Time? Wedbush analyst Dan Ives has been pounding the table on tech, forecasting a 12% to 15% end-of-year rally. His view is that September quarter earnings will be “an eye-opener,” driven by a combination of AI growth and stabilizing IT spending. Well, maybe. There’s no question that AI is affecting every company, and it will be an earnings contributor at some point. But the AI boom didn’t move the revenue needle for most tech firms in the June quarter, and AI won’t provide a material boost to the September quarter, either. Long-term investors won’t care, but short-term disappointment seems likely. Investment in AI-related infrastructure will outweigh incremental revenue for now at companies like
Alphabet
(GOOGL) and Meta.
Gone Fishing: If you want to bottom fish, consider
Amazon.com
(AMZN), which is off 9% over the last month.
MoffettNathanson analyst Michael Morton says Wall Street’s profit outlook is too bearish. He recently updated his 2024 forecast for pretax profit to $51 billion, from $45 billion, based on “growing conviction” about Amazon’s progress on cost controls. He notes that CEO Andy Jassy has said a redesign of the company’s distribution network cut delivery miles by 19%.
Morton has a $189 target price on Amazon stock, implying a 45% return. “There’s never an easy time to own Amazon shares,” he writes.
For now, Morton argues, investors should focus on the company’s improving cost structure—and growing margins.
Write to Eric J. Savitz at [email protected]
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