When you are a stock priced for greatness but only deliver a super good earnings report…sometimes investors will get in a huff.
Such is the case with the initial crop of earnings from tech behemoths Microsoft (MSFT), Advanced Micro Devices (AMD), and Alphabet (GOOG, GOOGL). The three stocks (with a combined market cap of $5.2 trillion) were instrumental in powering the broader market to records over the past year, but are getting dinged after reporting earnings late Tuesday.
The moves are “signaling some overextension of the recent strong rally,” said Deutsche Bank strategist Jim Reid in a client note seen by Yahoo Finance.
At first glance, the negative moves in the stock prices would seem counterintuitive to the average investor who have ridden these tech giants to massive paper gains.
But here is the deal, as President Biden would put it.
That average investor probably read the earnings releases of these bellwether companies last night. I’ll say a good percentage of them listened to the earnings calls (which you should be doing!).
By 7:00pm last night, with a full page of notes, many investors still can’t figure out why these stocks are being swept into downdrafts.
All three companies showed impressive growth numbers (especially AMD, with data center sales up 38% year over year and a 75% hike to 2024 AI chip sales estimates), hyped the AI train again (a surefire ticket for stock gains last year), and didn’t sound serious alarm bells on the economy.
So what gives?
The reality is that none of these quarters were perfect, versus investor expectations of perfection. And believe me, investors have priced in perfection to these stocks: according to Yahoo Finance data, these three stocks trade on an average forward P/E multiple of 35 times. The S&P 500 trades at 22 times, for perspective.
The vibe coming off these earnings, according to sources, is that growth is good because of the expansion of new AI tools and other businesses, but not mind-blowingly good.
Microsoft’s results unearthed some caution on the economy, pros say.
“While Microsoft’s F2Q24 top-line results for the two most important businesses (Azure and Office 365 Commercial) were in line to a little better than consensus expectations (and guidance), they were a bit below what our Plausible scenario anticipated, indicating slightly moderating business momentum,” Guggenheim analyst John DiFucci wrote in a note to clients.
Google missed estimates for its ad revenue (from Search and Youtube), and its cloud business didn’t light it up versus larger rival in Microsoft’s Azure.
Jefferies analyst Brent Thill noted on Alphabet: “Strong ad demand drove accelerating, double-digit growth in Search and YouTube, though shy of some investor bogeys. Cloud growth re-accelerated, but remains below Azure.”
As for AMD, its gaming chip sales fell 17% from the year prior, and guidance didn’t wow the investing masses.
“This knee-jerk reaction [to tech results] is noise, the AI revolution has started,” Wedbush analyst Dan Ives told me via email.
Perhaps.
But all in, Apple (AAPL), Meta (META), Nvidia (NVDA), and other members of the Magnificent 7 will have to do better than Microsoft, AMD, and Alphabet to impress investors demanding excellence paired with a side of perfection.
If they don’t, 2024 may go down as the year of the Unmagnificent 7.
