Microsoft (MSFT) -) and Google parent Alphabet (GOOGL) -) will lead a run of earnings reports from five of the biggest tech stocks in the market this week as investors look for the so-called "Magnificent Seven' to extend the Nasdaq's best first half rally in more than four decades.
Meta Platforms (META) -) and Amazon (AMZN) -) are also slated to report June quarter earnings this week in what could be a crucial test for tech stocks, and mega-cap names in particular, amid a dizzying first half rally powered in part by the rapid emergence of AI-related technologies.
The challenge now, however, is for companies at the forefront of this year's AI hype to justify their elevated stock values with definitive forecasts that link the new technology to hard revenue gains and, ultimately, to improve earnings potential.
"We believe this is one of the most important earnings week for the tech sector in many years," said Wedbush analyst Dan Ives. "With tech stocks showing a robust performance through the first half of 2023 now the Street needs to see what this AI Revolution holds for the tech sector heading into the rest of 2023 and 2024."
Microsoft, which spearheaded this year's AI frenzy with its $30 billion backing of OpenAI, the company behind the ChatGPT chatbot, will lead the earnings rush after the close of trading Tuesday with its fiscal fourth quarter earnings and 2024 outlook.
Analysts expect the group to post a bottom line of $2.55 per share, up 14.3% from last year, on revenues of $55.5 billion. Slowing growth rates in its Intelligent Cloud division, which houses its benchmark Azure product, will likely need to be offset by a robust AI forecast if the stock is to maintain both its year-to-date gain of 43.1% and its current price-to-earnings ratio of 37.3x, nearly twice the level pegged to the S&P 500, which is up 18% for the year.
D.A. Davidson analyst Gil Luria, however, thinks Microsoft's lofty valuations are, at least to some degree, justified.
"We believe the company's positioning for value capture today is among the most compelling in the last two decades of its history," he said. "(Satya) Nadella's actions since his CEO appointment in 2014 have already generated substantial value and have poised the business for this Generative AI chapter in technology."
"Microsoft's early and aggressive push into AI through its OpenAI relationship and internal development have made it an essential partner for other technology companies, and the lead candidate for enterprise customers exploring their AI strategies," he added.
Google is also expected to leverage its AI potential, and its leadership in online search, as it navigates both a pullback in enterprise spending on cloud services and an uneven recovery in global ad spending.
Co-founder Sergey Brin, in fact, has returned to the tech giant to help its AI development as it fends off the strongest challenge yet -- vis Microsoft's ChatGPT-powered Bing -- to its Google Chrome dominance.
Google is expected to see earnings rise 10.7% from last year to $1.34 per share, with revenues nudging 4.4% higher to $72.8 billion.
"Heading into the second half of 2023 we see a much broader tech rally ahead as investors further digest the ramifications of this $800 billion AI spending wave on the horizon and what this means for the software, chip, hardware, and tech ecosystem over the next year," Ives added. "We believe overall the tech sector will be up another 12%-15% in the second half of this year led by software and the chip sector with Big Tech remaining the "torch bearer" for this tech rally continuing to heat up."
The influence of so-called Big Tech stocks, which Bank of America has dubbed 'The Magnificent Seven," has been significant for markets this year, with Apple AAPL, Microsoft, Google, Meta, Amazon, Tesla (TSLA) -) and Nvidia (NVDA) -) comprise around 9 percentage points of the S&P 500's year-to-date gain.
These seven stocks also make up nearly a third (around 31%) of assets under management in its Global Wealth and Investment Management division, a 44% increase since the start of the year.
“The Magnificent Seven are going to need robust earnings to explain their sky-high valuations," said Nigel Green of London-based deVere Group. "In addition, they will need the guidance to indicate future quarters to be higher than anticipated for shareholders to receive additional gains. Should this not happen, we could see these stocks shed some of the advances.”
"Such is their weight, the Magnificent Seven earnings we receive in the next week or so will set global investors’ portfolio positioning for the foreseeable future," Green added.
Meta and Amazon are also expected to highlight their AI bona fides, with the former also likely to articulate its ambitions for Threads, the new micro-blogging app it launched last month in order to take advantage of the seemingly unending series of changes taking place at Elon Musk's Twitter.
Meta also unveiled a series of new AI-related tools it plans to roll-out across its various apps earlier this month, including a chatbot similar to ChatGPT for Facebook Messenger and WhatsApp and has said its been working with advertisers in testing consumer-facing generative AI techniques.
A more significant near-term issue for Meta, however, is the pace of growth in digital ad spending, which comprises the vast majority of its revenue stream. The bulk of that, of course, comes from small businesses, which are far more exposed to cyclical conditions than their international counterparts.
And with the stock up more than 40% since its first quarter earnings in April, and trading with a price-to-earnings ratio of 35.3x, its near-term ad market outlook will be critical.
Analysts expect Meta to post a bottom line of $2.92 per share, up 18.7% from last year, with revenues up 8% to $31.1 billion, when it publishes June quarter earnings after the close of trading on Wednesday - just hours after the Federal Reserve's June rate decision.
Amazon rounds out the week of 'Magnificent Seven' updates after the close of trading on Thursday
Amazon, which is up 55% for the year, is trading at the highest levels since September of last year as investors bet that its new AI project, the AWS Generative AI Innovation Center, will help business clients build and deploy solutions that lever the power of generative AI and offset slowing growth in its Web Services Division.
AWS is likely to see growth of around 9.8% over the second quarter, the lowest on record, amid a pullback in enterprise spending. AWS contributed $21.4 billion to the group's overall sales last quarter, a 16% increase from last year, but slowing growth rates and narrowing margins have raised concerns for the division's profitability heading into the second half of 2023.
Bringing new customers into an AI-focused program could create new selling opportunities for AWS as Amazon's broader consumer and e-commerce units see moderating growth as the economy slows and retail sales fade amid elevated inflation rates.
Amazon said it sees operating income of between $2 billion $5 billion on revenues in the range of $127 billion to $133 billion for the three months ending in June following stronger-than-expected first quarter earnings earlier this year.
Analysts are looking for net income of 35 cents per share, up from last year's loss of 20 cents per share, on revenues of $131.7 billion.
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