Tech Stocks Brace for Earnings Season Challenges
As the highly anticipated earnings season kicks off, tech stocks are facing some significant hurdles that could impact their performance in the market. After a strong start to the year, with the Nasdaq Composite surging 32% in the first half of 2023, the momentum seems to have waned in the second half, resulting in a 1% decline since June 30.
The challenges begin with the Federal Reserve’s tightening cycle, which has exceeded expectations on Wall Street. This tightening cycle has raised concerns among investors, as it could potentially impact the tech industry’s growth prospects. Additionally, the initial hype surrounding generative artificial intelligence (AI) has given way to more nuanced views. There are now concerns about the economic viability of AI, which requires significant investments in expensive processors and hardware, with uncertain returns.
The investments in AI also pose a threat to the margin improvements that tech firms like Meta Platforms have been emphasizing as part of their year of efficiency narrative. With doubts surrounding the near-term prospects for corporate IT spending, the overall outlook for tech stocks in this earnings season remains uncertain.
Netflix, the streaming pioneer, will be the first to report its earnings on Wednesday, and investors will be closely monitoring the progress of its password-sharing program, the performance of its nascent advertising-supported subscription tier, and the lingering effects of labor actions in Hollywood. Morgan Stanley analyst Benjamin Swinburne recently adjusted his price target on Netflix, citing concerns about overly optimistic estimates based on expectations of robust growth in password sharing and advertising.
Another area of concern is IT budgets. While there were hopes of loosened budgets as 2024 gets underway, a recent survey by Piper Sandler suggested signs of trouble. The survey of more than 30 tech resellers revealed weaker spending trends than previously seen, which could limit overall spending in the upcoming year. IBM’s earnings report later this month is expected to provide insights into IT spending trends.
Despite these challenges, some analysts are optimistic about a potential rally in tech stocks. Wedbush analyst Dan Ives is forecasting a 12% to 15% end-of-year rally, driven by the growth of AI and stabilizing IT spending. However, it is important to note that while AI is expected to have a long-term positive impact, it did not significantly boost revenue for most tech firms in the previous quarter, and its contribution to the upcoming quarter is also projected to be modest. It appears that investment in AI-related infrastructure will outweigh the incremental revenue for companies like Alphabet and Meta.
For investors looking for opportunities, Amazon.com might be worth considering. The stock has dropped 9% in the past month, presenting a potential opportunity for bottom fishing. MoffettNathanson analyst Michael Morton believes that Wall Street’s profit outlook for Amazon is too bearish. He recently revised his 2024 forecast for pretax profit based on growing confidence in Amazon’s progress in cost controls. Morton highlights CEO Andy Jassy’s comments about a significant reduction in delivery miles due to a redesign of the company’s distribution network.
Morton has set a target price of $189 for Amazon stock, suggesting a potential 45% return. He advises investors to focus on the company’s improving cost structure and growing margins.
In conclusion, the upcoming tech earnings season is expected to be challenging, with tech stocks facing headwinds from the Federal Reserve’s tightening cycle, concerns about the economic viability of AI investments, and potential limitations on corporate IT spending. However, some analysts remain optimistic about a potential rally, driven by AI growth and stabilizing IT spending. Investors looking for opportunities may find potential value in Amazon’s improving cost structure and growing margins, as the stock has dipped in recent weeks. As always, it is crucial for investors to carefully evaluate the risks and opportunities presented by the tech sector before making any investment decisions.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice.
