(Bloomberg) -- Whether this Big Tech earnings season turns out to be a success or disappointment will likely come down to results from Apple Inc. and Amazon.com Inc. later Thursday.
The earnings reports — the last from the so-called Magnificent Seven companies aside from Nvidia Corp. — come a day after results from Microsoft Corp. and Meta Platforms Inc. failed to impress investors, sending their shares lower and weighing on the broader market. That followed better-than-expected results from Alphabet Inc. on Tuesday and Tesla Inc. last week.
Strong reports from Apple and Amazon.com could cement the narrative that the megacap tech group remains Wall Street’s most reliable trade. Disappointments, coupled with the pair’s index weight and multiples, could dash hopes of the market returning to record levels.
“The bar is already very high simply because valuations are very high,” said Russ Mould, investment director at AJ Bell. “Investors have become accustomed to the Mag7 and tech and AI-related names not just beating forecasts but smashing them — and then raising guidance for the next quarter.”
Investors are looking to Apple to at long last provide concrete information about demand for iPhones with artificial intelligence features, a product cycle investors are counting on to propel the company out of a low-growth era.
Amazon’s report will give insight into the state of the consumer with its e-commerce business, while results from its cloud-computing business will show any tailwind from AI, following similar reports from Alphabet and Microsoft.
Shares in Apple and Amazon have essentially kept pace with the market this year. Apple dipped as much as 1.6% on Thursday while Amazon fell 3.7%. Technology was the worst performing of the main sectors in the S&P 500 Index, which is on track for its worst day since Sept. 6 with a decline of 1.6%.
The stakes for Thursday’s earnings reports from the pair have been raised after the market’s negative reaction to results from Microsoft and Meta, which both pledged to continue to boost spending on AI computing gear.
Microsoft tumbled on Thursday after the software maker gave a disappointing forecast for its Azure cloud-computing business. The stock fell as much as 6.1%, on track for its worst decline in two years. Meta’s fourth-quarter revenue forecast fell short of some expectations after only narrowly exceeding the average of analyst estimates at the midpoint. Shares of the Facebook owner fell as much as 4.7%.
Apple, in particular, could be vulnerable. Revenue is expected to grow less than 2% in its 2024 fiscal year, and while Wall Street sees that accelerating to 7.6% in fiscal 2025, that’s well below other megacaps, which have consistently delivered double-digit growth. Yet, the company trades at 31 times estimated earnings, a premium of more than 50% over its 10-year average.
Wall Street has been growing cautious, especially amid signs of limited immediate interest in the AI iPhone. The stock has been downgraded twice this month, with both KeyBanc and Jefferies saying optimism has gotten excessive. Amazon received a rare downgrade of its own this month, as Wells Fargo Securities cited margin concerns that its cloud business may not be able to compensate for.
Amazon shares could also be in a precarious position — the stock has clawed back losses following its August report, but remains below July highs. Alphabet’s report could be seen as a good sign for Amazon’s AWS cloud segment, as investors will also be watching for payoff from the company’s heavy spending on artificial intelligence.
“What I heard on the Google call made me pretty optimistic,” said Mark Malek, chief investment officer of Siebert Financial Corp. “Assuming Amazon can talk similarly about the cloud, how they’re monetizing and their clients, I think that is gonna be critical for them.”
Analysts expect about $27.5 billion in AWS revenue in the quarter, up more than 19% on the year, according to estimates compiled by Bloomberg. If Amazon misses those expectations, “you could see this narrative of AWS being a share loser in cloud infrastructure gain some steam,” said John Belton, a portfolio manager at Gabelli Funds.
Amazon investors will also be watching margins closely — across its cloud and retail businesses — for signs of growth.
Amazon needs to show “some degree of positive momentum in margin improvement,” said James Abate, chief investment officer at Centre Asset Management LLC. “The fact that we’ve seen margins continue to move higher in AWS is a really very important point given that heavy infrastructure investment that they’re making.”
Top Tech Stories
- Meta Platforms Inc. CEO Mark Zuckerberg will ramp up heavy investments in AI and other futuristic technologies, continuing a years-long tug-of-war between the company’s long-term bets and the core advertising business that provides the vast majority of Meta’s revenue.
- Microsoft Corp. shares dropped in late trading after the software maker forecast slower quarterly cloud revenue growth, reflecting the company’s struggle to bring data centers online fast enough to keep up with demand for artificial intelligence services.
- MicroStrategy Inc. has hired banks to help it raise $42 billion through the sale of new shares and fixed income to buy more Bitcoin after a flurry of deals over the past year.
- Samsung Electronics Co. declared progress in supplying its most advanced AI memory chips to Nvidia Corp., seeking to reassure to investors who fear the company is falling further behind SK Hynix Inc. in a red-hot market.
- Andy Jassy kept prodding Alexa with sports questions. It was summer 2023, and Amazon.com Inc.’s chief executive officer wanted to see if a prototype of the voice assistant, upgraded with artificial intelligence, was good enough to compete with ChatGPT, the AI chatbot from OpenAI that had wowed the world around eight months earlier with its conversational wizardry.
Earnings Due Thursday
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- Open Text
- Arrow Electronics
- Insight Enterprises
- Vontier Corp
- Belden
- Itron
- Allegro MicroSystems
- InterDigital
- SolarWinds
- CoreCard
- Comcast
- Roblox
- Cinemark
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- Clear Channel Outdoor
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- Apple
- Amazon
- Intel
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- Juniper
- Onto Innovation Inc
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--With assistance from Subrat Patnaik, Jeran Wittenstein and Brandon Harden.
(Updates stock performance throughout.)
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