Tag: Earnings

Microsoft Stock Drops as AI Spending Weighs on Profits Amid Slower Cloud Growth

Posted on by slightbourne@noblecapitalmarkets.com
Key Points
– Microsoft stock drops over 5% following a cautious Q2 forecast, marking its worst one-day fall in two years.
– Rising AI and cloud investments contribute to a 50% surge in property and equipment spending, raising profitability concerns.
– Azure’s growth slows amid supply chain delays, as Microsoft continues aggressive AI investment with OpenAI.

Microsoft’s shares plummeted over 5% on Thursday following a quarterly forecast that fell short of Wall Street’s expectations, marking its steepest drop since October 2022. Despite better-than-anticipated revenue and earnings for the recent quarter, the software giant’s guidance for the December period led investors to re-evaluate the impact of high spending on artificial intelligence (AI) and cloud infrastructure.

The tech giant reported a 16% revenue increase year-over-year, reaching $65.59 billion, beating the $64.51 billion estimate. Earnings per share also exceeded predictions, landing at $3.30 against an expected $3.10. Net income rose to $24.67 billion, up from $22.29 billion in the same quarter the previous year, indicating robust performance in core business areas, particularly in cloud services.

However, Microsoft’s forecast for its December quarter revenue—projected between $68.1 billion and $69.1 billion—fell slightly below analysts’ expectations of $69.83 billion. While these numbers imply a 10.6% growth in revenue, the miss signals potential challenges ahead as AI and cloud infrastructure investments weigh heavily on profitability. Microsoft’s Azure cloud platform saw a 33% growth this quarter, yet growth projections for the next quarter suggest a slight deceleration, expected between 31% and 32%, according to CFO Amy Hood.

In comparison, Google recently reported 35% growth in its cloud division, and Amazon, the leader in cloud services, is set to release its own earnings, with analysts keenly watching its results for further insights into the competitive cloud landscape. Microsoft has continued to ramp up spending to expand its AI capabilities, particularly through its $14 billion investment in OpenAI, valued at $157 billion. The company expects a significant $1.5 billion loss on this investment in the current quarter due to substantial operational expenses.

CEO Satya Nadella acknowledged supply chain delays in data center infrastructure from external suppliers, which are likely to affect Microsoft’s ability to meet rising demand for its services this quarter. Nadella remains optimistic that these challenges will ease later in the fiscal year as supply and demand align more closely.

Microsoft’s substantial investments in AI and infrastructure have not come without financial strain. Property and equipment expenses surged 50% year-over-year to nearly $14.92 billion, surpassing analyst expectations. This hike reflects Microsoft’s commitment to maintaining a competitive edge in AI and cloud services but also raises questions regarding the sustainability of such high spending levels.

Analysts from BofA Global Research still advise buying Microsoft stock despite the conservative outlook, suggesting that the firm’s core growth engines, like Azure and Office, remain solid. However, they note that the significant AI infrastructure spending may weigh on short-term profitability. Meanwhile, Microsoft’s shares, which were up 9% for the year, trail the Nasdaq’s 21% increase year-to-date, revealing investor caution around Microsoft’s aggressive spending strategy in AI.

As the tech sector continues to pivot towards AI and cloud solutions, Microsoft’s situation exemplifies the challenges of balancing growth with heavy investment costs. While the company’s AI ambitions signal promising long-term growth, the cautious near-term outlook on profitability could lead to further stock volatility as investors navigate the risks and rewards associated with Microsoft’s AI and cloud strategy.

Wall Street Awaits Alphabet Earnings as Markets Trade Mixed

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Alphabet gained ahead of its quarterly report, seen as a key influencer for the tech-driven “Magnificent Seven” group.
– Companies like VF Corp and D.R. Horton had earnings-driven movements that affected sectors such as retail and housing.
– U.S. job openings fell, while consumer confidence exceeded expectations, suggesting mixed signals on economic resilience.

Ahead of Alphabet’s highly anticipated earnings report, Wall Street’s main indexes remained mixed on Tuesday. Alphabet, a top tech leader and a key part of the so-called “Magnificent Seven” group of mega-cap stocks, traded up by 1.8% in anticipation of the report, set to be released after the market close. As one of the top-performing tech stocks, Alphabet’s performance will influence the broader market’s direction and its ongoing focus on artificial intelligence investments, which have driven much of the tech sector’s gains this year.

Alphabet’s performance comes amid a heavy week for S&P 500 earnings reports. This week, five of the “Magnificent Seven” companies, which have been instrumental in boosting the market, are scheduled to report quarterly results. Investors and analysts alike view these results as key indicators for whether Wall Street’s tech-driven momentum can continue through year-end.

Beyond Alphabet, other large tech players displayed a mixed performance, with Nvidia gaining 0.6% and Apple adding 0.2%, while Tesla fell 1.4%. The performance of these stocks is closely monitored, as they collectively represent a substantial portion of the S&P 500’s market capitalization. The potential for a leveling-off in growth between these “high fliers” and the rest of the market is increasingly under scrutiny by investors.

Adding to the mix, several other corporations released quarterly earnings reports. VF Corp, the parent company of Vans, saw a notable 22.2% jump in its stock price following the announcement of its first profit in two quarters. Conversely, D.R. Horton, the major U.S. homebuilder, dropped 8.5% after delivering revenue forecasts below market expectations. Other homebuilders also declined, with the PHLX Housing index on track for its largest single-day drop since April. Meanwhile, Ford reported that it expects to achieve the lower end of its annual profit target, sending its shares down by over 8%. Chipotle also saw a decrease ahead of its report later in the day.

In economic news, recent data from the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) revealed that job openings in September came in at 7.44 million, lower than the expected 8 million, suggesting a possible cooling in labor market demand. Additionally, a report on consumer confidence exceeded expectations, reaching 108.7 in October compared to the estimated 99.5, indicating continued consumer resilience.

The benchmark U.S. 10-year Treasury yield also reached a high of 4.3%, marking the first time since early July it hit this level. The rise in bond yields led to a decline in bond-linked sectors, with utilities dropping 1.8% as they tend to respond inversely to yield changes. Bond market dynamics have placed added pressure on stocks with bond-like characteristics, such as utilities.

With the Federal Reserve’s upcoming policy meeting, rising Middle East tensions, and the Nov. 5 U.S. elections looming, investors are bracing for volatility in the weeks ahead. The potential for shifts in monetary policy and new geopolitical developments could further influence market performance and investor sentiment.

Wall Street’s Investment Banking Rebound: A Sign of Hope?

Posted on by slightbourne@noblecapitalmarkets.com

In a promising development for the financial sector, major Wall Street banks have reported significant improvements in their investment banking divisions for the second quarter of 2024. This uptick is a welcome change following a prolonged period of sluggish activity in the wake of the global pandemic.

Citigroup led the charge with an impressive 60% surge in investment banking revenue, reaching $853 million. JPMorgan Chase followed closely with a 50% growth in investment banking fees, surpassing their earlier projections of a 25% to 30% increase. Wells Fargo rounded out the trio with a robust 38% jump in investment banking revenue, totaling $430 million.

These figures align with broader market trends observed in the first half of 2024. Global merger and acquisition (M&A) volumes hit $1.6 trillion, marking a 20% increase from the previous year. Similarly, equity capital market volumes saw a 10% uptick during the same period, according to Dealogic data.

Despite these encouraging numbers, bank executives are tempering their optimism with caution. Citigroup’s Chief Financial Officer, Mark Mason, highlighted a strong pipeline of announced deals expected to materialize in late 2024 and into 2025. However, he also pointed to several factors that could influence future performance, including the upcoming U.S. presidential election, potential shifts in interest rates, inflation trends, and changes in the regulatory landscape.

JPMorgan’s CFO, Jeremy Barnum, echoed this sentiment, noting that while dialogue around M&A activity is “robust,” actual deal execution remains muted. Barnum also expressed surprise at the relatively low level of initial public offering (IPO) activity, given the strength of equity markets. He attributed this to the concentration of market gains in a few large stocks, while mid-cap technology companies – typically prime candidates for IPOs – have shown less buoyancy.

The market reaction to these results was mixed, suggesting investors are weighing the positive news against broader economic concerns. Wells Fargo shares dipped 6% following the earnings announcement, with the bank missing analysts’ estimates for interest income. Citigroup saw a 1.5% decline in its stock price, with investors expressing concerns about expenses and market share. JPMorgan shares also edged down slightly, by 0.3%, as some worry about costs and provisions.

These results from major U.S. banks mark the beginning of the second-quarter earnings season, offering a glimpse into the health of the financial sector and, by extension, the broader economy. The rebound in investment banking activities signals a potential uptick in corporate confidence and economic activity. However, the cautious outlook from bank executives underscores the complex interplay of factors influencing the financial landscape.

As we move into the latter half of 2024, all eyes will be on how these promising trends in investment banking evolve. The industry’s performance will likely be shaped by macroeconomic factors, political developments, and shifts in the regulatory environment. While the current quarter’s results offer reason for optimism, they also remind us of the ever-present uncertainties in the global financial markets.

Salesforce Sell-Off Shakes Tech, AI Sectors But Could Spell Opportunity

Posted on by slightbourne@noblecapitalmarkets.com

Salesforce’s shocking earnings miss and subsequent stock plunge sent shockwaves through the technology and artificial intelligence spaces on Thursday. But some investors see the dramatic selloff as a potential chance to buy into the AI growth story on the dip.

Shares of the cloud software giant cratered over 20% in early trading, putting the stock on pace for its worst single-day decline since going public nearly two decades ago. The plunge came after Salesforce reported its first top-line miss since 2006 and provided disappointing guidance, surprising Wall Street and raising concerns about cracks in business spending.

The selloff rapidly spread across the tech sector, with the Nasdaq tumbling over 2% as investors fled growth stocks. AI industry leaders were among the biggest drags on the index amid fears Salesforce’s shortfall could indicate broader economic turbulence.

While the numbers were clearly disappointing, some analysts remain steadfastly optimistic that Salesforce’s fortunes will turn as artificial intelligence proliferates. With $13.5 billion in cash and a portfolio of AI capabilities from its acquisition of startup Anthropic, contrarians are betting the company is well-positioned to monetize generative AI technologies over the long haul.

For small cap and retail traders, Salesforce’s dramatic share price compression could open an attractive entry point. The stock’s forward P/E has plunged below 20, near multi-year lows despite its exposure to the “game-changing AI theme.” With a market cap around $178 billion as of Thursday, some view Salesforce as a relative bargain in the potential AI winners circle.

AI economies of scale could help Salesforce flex its tech muscles again before too long. One firm expects the company to increasingly leverage AI not just for products, but also for improving productivity and driving revenue engine automation. Cost streamlining aided by AI could lift operating margins towards the company’s target over time.

For traders and institutions alike, the frenzied selling appears to be creating an intriguing disconnect between Salesforce’s current valuation and what bulls perceive as enviable AI exposure compared to pricier megacap tech names. If dark economic clouds do part, the recent plunge could mark an opportunistic entry point.

Volatility around AI innovators is likely to remain elevated as the marketplace continues rapidly evolving. However, Salesforce’s cloud presence, entrenched client base, and multi-billion AI investments suggest it’s far too early to throw in the towel on this pioneering tech trailblazer.

Google Joins the $2 Trillion Club as AI Ambitions Pay Off

Posted on by slightbourne@noblecapitalmarkets.com

In a landmark achievement, Alphabet Inc. (Google’s parent company) has officially become the 4th publicly traded company in history to cross the $2 trillion market capitalization threshold. After briefly touching this vaunted level in late 2021, Google has now comfortably sustained a $2 trillion-plus valuation for an entire trading day amid investor enthusiasm for its artificial intelligence initiatives.

Google now stands among an exclusive group of megacap tech titans alongside Apple ($2.6T), Microsoft ($3.0T), and chipmaker Nvidia ($2.2T). E-commerce behemoth Amazon is nipping at Google’s heels with a $1.8T market cap, while social media giant Meta lags at $1.1T after its controversial metaverse pivot.

The milestone cements Google’s status as a generational company and one of the most pivotal names reshaping the world through cutting-edge AI development. While Google built its fortune through pioneering internet search and digital advertising, investors are now betting billions that its bold AI plays will unlock massive new revenue streams for decades to come.

Alphabet’s surge past $2 trillion follows the company reporting blowout Q1 2024 earnings results that highlighted its AI progress. Revenue jumped 15% year-over-year to $80.5 billion, with profits increasing 14% to $23.7 billion. These robust gains came even as Google enacted cost-cutting layoffs and refocused spending toward generative AI like the company’s new Gemini chatbot.

On the earnings call, CEO Sundar Pichai expressed confidence Google was finding “small” ways to monetize AI already, such as improving ad targeting through its Performance Max platform. However, he signaled a go-slow approach to preserve the integrity of Google’s flagship search business. “We’re being measured in how we do this, focusing on areas where Gen AI can improve the search experience while also prioritizing traffic to websites and merchants,” Pichai stated.

Google’s strong performance across its legacy businesses gave it financial flexibility to make big AI investments. Search advertising was up 14%, YouTube ads grew 21%, and premium subscription revenues rose 18% on increasing YouTube Premium adoption. Even after over $700 million in severance costs from layoffs, Google’s operating margins remained at robust levels.

The solid Q1 results helped convince Wall Street that Google has the resources and focus to remain an AI leader. Unlike rival Meta’s stock sliding 10% recently when it warned of heavy AI investment before future payoffs, Alphabet shares surged over 5% as investors cheered its $70 billion share buyback authorization and first-ever $0.20 quarterly dividend initiation.

For investors, Google’s $2 trillion valuation reflects optimism in the company’s ability to commercialize emerging AI technologies across products like search, cloud computing, smart devices, and digital advertising. AI is expected to unlock multi-trillion dollar growth opportunities by enhancing products, streamlining operations, accelerating research, and spawning new business models.

However, realizing AI’s transformative power will require overcoming major hurdles like developing ethical guidelines, addressing data privacy, navigating a patchwork of regulations, and solving issues like bias and transparency. Failure to responsibly implement AI could open Google and peers to public backlash and legal consequences.

Yet the upsides transcend profits – the companies driving the AI revolution may gain outsized influence in shaping this disruptive technology’s societal impact for decades. For Google and its big tech brethren, striking the right balance between rapid AI development and responsibility will be as critical as the technology breakthroughs themselves.

With a $2 trillion stamp of approval, the AI era has officially arrived for Google. The search giant now faces heightened pressures to deliver on its vision of AI ushering in a new wave of groundbreaking innovations and economic prosperity. For a company born into humble startup origins, this lofty $2 trillion AI perch brings both unprecedented opportunities and unprecedented challenges.

The Week Ahead – Earnings, Interest Rates, and US Dollar

Posted on by phoffman@channelchek.com

This Trading Week – Earnings Reports are Likely to Set the Tone

Just over half of the companies in the S&P 500 have now reported second-quarter earnings. Of these companies, 80% have surprised on the high side with actual EPS above the average estimate – 4% have reported earnings equal to the average expectations. The reporting sectors beating estimates by the most are Information Technology at 93%, and Communication Services, which beat average estimates 92% of the time. Of sectors that beat the least often, Utilities and Financials were at the bottom of the list at 67% and 70%, respectively, surpassing average estimates. These are also above 50%, supporting strong stock markets.

The weaker US dollar has helped companies with more international exposure as these have had improved year-over-year earnings above those companies with a higher percentage of domestic revenue.

The markets are likely to focus on the earnings reports this week as economic releases will be slow. Stocks may also take its cue from interest rates that have been rising for longer duration US Treasuries.

Monday 7/31

•             9:45 AM ET, The Chicago Purchasing Managers Report is expected to improve 2 points in July to a still very weak 43.5 versus 41.5 in June, which was the tenth straight month of sub-50 contraction. Readings above 50 indicate an expanding business sector.

•             10:30 AM ET, The Dallas Fed Manufacturing Survey is expected to post a 15th straight negative score, at a consensus minus 22.5 in July versus minus 23.2 in June. The Dallas Survey gives a detailed look at Texas’ manufacturing sector, how busy it is, and where it is headed. Since manufacturing is a major sector of the economy, this report can greatly influence the markets.

Tuesday 8/1

•             9:45 AM ET, the final Purchasing Managers Index (PMI) for manufacturing for July is expected to come in at 49.0, unchanged from the mid-month flash to indicate marginal contraction (above 50 indicates expansion).

•             10:00 AM ET, Construction Spending for June is expected to rise a further 0.6 percent following May’s 0.9 percent increase that benefited from a sharp jump in residential spending.

•             10:00 AM ET, JOLTS (Job Openings and Labor Turnover Survey) still strong but slowing is the consensus for June as it is expected to ease 9.650 million from 9.824 million.

Wednesday 8/2

•             10:00 AM ET, New Home Sales are expected to slow after a much higher-than-expected 763,000 annualized rate in May. Junes are expected to have slowed to 727,000.

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 8/3

•             8:30 AM ET, Jobless Claims for the week ended July 30, 2023, are expected to come in at 225,000 versus 221,000 in the prior week. Claims have been moving lower in recent weeks. This is a classic case of where what might otherwise be considered worsening news (increased jobless claims) may be taken well by the market as tight labor markets are considered additive to inflation pressures.

•             8:30 AM ET, Productivity and Costs (nonfarm) is expected to rise at a 1.3 percent annualized rate in the second quarter versus 2.1 percent contraction in the first quarter. Unit labor costs, which rose 4.2 percent in the first quarter, are expected to rise to a 2.6 percent rate in the second quarter.

•             9:45 AM ET, PMI Services. Following Tuesday’s PMI Composite Final for manufacturing, which has been contracting, the Services Purchasing Managers Index is expected to indicate no change at 52.4 as the July final.

•             10:00 AM ET, Factory Orders are expected to rise 1.7 percent in June versus May’s 0.3 percent gain. Factory Orders is a leading indicator that economists and investors watch as it has been a fairly reliable indicator of future economic activity.

•             10:00 AM ET, The Institute for Supply Management (ISM) gauge is expected to have slowed to 53 from June’s 53.9 level. An ISM reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining.

•             4:30 AM ET, The Fed’s Balance Sheet is expected to have decreased by $31.208 billion to $8.243 trillion. Market participants and Fed watchers look to this weekly set of numbers to determine, among other things if the Fed is on track with its stated quantitative tightening (QT) plan.

Friday 8/4

•             8:30 AM ET, Employment Situation is expected to show that the unemployment rate unchanged at 3.6%, with a consensus for payrolls at 200,000 versus the 209,000 reported in June.

What Else

On Thursday quarterly results will be reported on Apple (AAPL) and Amazon (AMZN). The week will be the busiest one of the earnings season. About 30% of the S&P 500 will give their financial updates during the week, including Alphabet (GOOGL), Microsoft (MSFT), Meta (META), and Robinhood (HOOD). Several big pharma companies are getting ready to report, and it’s a big week for industrial companies and big oil as well.

We’re near the halfway point for Summer 2023. Have you signed up to receive Channelchek market-related news and analysis in your inbox?  Now is a good time to make sure you don’t miss anything!

Paul Hoffman

Managing Editor, Channelchek

Learn more about NobleCon19 here

Sources

https://tradingeconomics.com/calendar

https://us.econoday.com/byweek.asp?cust=us

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_072823.pdf