Tech Earnings Loom After Strong 2023

January 18, 2024
Tech sector stocks gained more than 50% last year, fueled by AI and signs of improvement in the cloud and chip markets. Upcoming Q4 results could give investors clues into 2024.

When info tech stocks stumbled to start the year, it disrupted a Wall Street party that roared through 2023 as investors embraced rapid advances in artificial intelligence and improved metrics in cloud computing.

Nvidia (NVDA) shares joined the $1 trillion market capitalization club with gains of more than 200% last year amid AI enthusiasm. Advanced Micro Devices (AMD) skyrocketed, too, as investors sent the PHLX Semiconductor Index (SOX) up more than 60% in 2023. Microsoft (MSFT) also found traction from AI, and Apple (AAPL), the largest U.S. stock, rallied despite revenue challenges.

This year is when the AI rubber arguably hits the road as investors seek evidence that tech companies can apply the technology in ways that lift revenue. Fourth-quarter earnings season could provide clues starting next week when IBM (IBM) and two major chip firms are expected to report. 

iPhones and cloud computing take center stage later in the earnings season with expected earnings from Alphabet (GOOGL) and AAPL on January 30 and February 1, respectively, according to Earnings Whispers. Amazon (AMZN) and NVDA are expected to report in February, as well. 

After eye-popping 2023, tech earnings seen strong again

In Q3, tech finished fourth among all S&P sectors with 14.5% year-over-year earnings per share (EPS) growth, according to research firm FactSet. Revenue growth that quarter was less impressive at 2.9%, though it topped overall S&P 500 revenue growth.

In Q4, analysts expect info tech to post another strong quarter on the bottom line with 15.6% EPS growth, FactSet said. That's up from the September 30 estimate of 14% and well above expected Q4 S&P 500 EPS growth of just below the flatline. Fourth-quarter tech revenue is seen rising a respectable 6.1%, according to FactSet, just about doubling the overall market.

Things could improve for tech as 2024 continues. Analysts expect 17% year-over-year EPS growth for the sector and 9.1% revenue growth in calendar year 2024, according to FactSet, up from 5.1% and 2.3%, respectively, in 2023. That puts tech second and first, respectively, among all sectors for those two metrics this year.

One aspect helping drive earnings strength for tech appears to be improving profit margins. Net profit margin for the sector improved to 25.5% in Q3 from 23% a year earlier, FactSet noted. 

Weak guidance, layoffs raise concerns

However, not every tech firm appears in vigorous health. Of the 46 companies in the sector that provided guidance heading into Q4 earnings season, 25 are forecasting a negative outlook, FactSet said.

Furthermore, Qualcomm (QCOM) and Nokia (NOK) recently announced job cuts. Layoffs in tech reached around 250,000 last year, peaking back in January 2023 with nearly 90,000 jobs eliminated that month alone, according to online publication TechCrunch. Some of the firms that downsized included AMZN, MSFT, Alphabet, and Meta Platforms (META), a wave of painful cuts that some economists said reflected too many hires during the pandemic era.

It's unclear if tech firms unloaded all the positions they wanted to last year or if more layoffs are ahead, but Q4 earnings season could shed light. 

Apple a question mark amid iPhone demand worries, sinking revenue

The elephant in the room for tech is the biggest stock in the U.S. market, AAPL. Shares fell nearly 10% recently from December highs amid analyst downgrades, a report from The New York Times that the Justice Department could file an antitrust suit against the iPhone manufacturer, and weak revenue tidings from major supplier Foxconn Technology that played into concern about demand for AAPL products. 

A late December cover story in Barron's added to the gloom, with a headline saying AAPL needs new growth to "justify" its stock price. The article also noted that AAPL's revenue has declined year over year the past four quarters and said that trend will likely continue when it reports in February. 

AAPL's plans for integrating or introducing AI into its offerings could be a topic of interest too. For instance, Bloomberg recently reported that AAPL plans to add some major generative AI features into products like Siri and Apple Music, though investors might have to wait until its June Worldwide Developers Conference for additional information.

China's recent economic weakness plays into concerns about AAPL and semiconductor shares. In addition, U.S. sanctions continue to take a toll on trade. Last year, China barred Chinese operators of key infrastructure from buying supplies from Micron (MU), a U.S. memory-chip maker, Reuters reported. However, there are signs of a thaw, Reuters said, after meetings late last year between Chinese and U.S. leaders. While détente may help trade, companies like AAPL still face tough competition in China from domestic tech firms.

Slow economic growth in other parts of the world remains a concern for cloud computing, which is sensitive to corporate demand. 

Cloud growth picked up steam in Q3 with Microsoft grabbing share

In Q3, MSFT's Azure cloud platform enjoyed 29% growth, accelerating from 26% a quarter earlier and surpassing Wall Street's 26% expectations. Meanwhile, Alphabet, which is third in cloud market share behind AMZN and MSFT, saw cloud revenue grow just 22% and miss analysts' estimates.

In its last earnings call, MSFT projected better-than-expected revenue guidance. It forecast Azure revenue growth of up to 27% in the most recent quarter, with an increasing AI contribution. MSFT received several price-target increases from analysts following its results.

The cloud growth of these companies raises several questions. One is whether MSFT gained share at the expense of Alphabet. Another is whether overall cloud growth is accelerating, and Alphabet simply didn't enjoy the new business. AMZN reported Amazon Web Services (AWS) cloud revenue is up 12.3% year over year.

When MSFT reports after the close on January 30, both the cloud and AI could take center stage. MSFT shares soared last year as it integrated AI software into the Bing search engine and invested $13 billion in OpenAI, CNBC reported.

For AI to really take off, however, more businesses will likely need to take advantage of the technology, and that's one metric to watch as firms like MSFT and NVDA report. Those two companies arguably benefited most from last year's AI excitement. However, even $1 trillion behemoths aren't complete masters of their fates, and investors may have to be patient and look beyond the current quarter. 

"We can gauge the potential impact of AI by monitoring the scale of investment into AI-related capital focused on information processing equipment and software," wrote Jeffrey Kleintop, chief global investment strategist at Schwab, in a post last year. "Business investment is likely to climb as the benefits of AI to their businesses becomes more evident, offering the potential for a productivity payoff in the second half of this decade."

That means investors might want to listen to earnings calls this quarter from AI players to get a sense of demand for their AI offerings and what course it might take in 2024.

Chip sector increasingly bifurcated

The semiconductor sector got a big lift from NVDA and AMD, which is seen as Nvidia's main competitor in chips and chip technology used for AI. Nvidia develops graphic processing units (GPUs) for AI, while AMD designs processors related to AI. AMD recently launched its own AI chip to challenge NVDA.

While much of the chip excitement surrounds AI applications, the basic blocking and tackling for most of the chip industry remains in the established businesses of data centers, video games, and use in consumer products like phones and automobiles.

A supply glut cast a shadow on chip makers last year, but a ray of sun peeked through two months ago when Taiwan Semiconductor (TSM), the world's largest contract chip maker, delivered a brighter demand outlook. Intel's (INTC) earnings around the same time appeared to reinforce ideas of an improved chip market. 

INTC's earnings, margin, and guidance all surpassed analysts' forecasts in what the chipmaker described as a "standout third quarter." Improved gross margin was a key metric after INTC struggled on that front recently. Further, its ability to work through supply and increase average selling prices contributed to margin improvement and raised hopes that the chip industry is seeing improved demand. 

INTC is expected to report January 25, the same week as chip maker Texas Instruments (TXN). AMD, often seen as the main AI competitor for Nvidia, is expected to report the following week. TSM sets the stage, reporting today.

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