Many are poo-pooing tech stocks after earnings. Did they miss bright spots like higher efficiency, margins, buybacks and AI that represent future growth or are job cuts and earnings misses enough reason to stay away?
Missed earnings and layoffs look ugly
The biggest tech stocks, the likes of Meta, Apple, Amazon, and Alphabet, together missed consensus earnings estimates by 8%. Big tech’s big miss is a stark reversal from the boom years during and immediately following the pandemic when the tech was the “darling of Wall Street” and one of the few stay-at-home trade winners.
Quarterly tech earnings have been disappointing for some time. According to analysts at the Bank of America, earnings growth in the tech-heavy Nasdaq has underperformed the S&P 500 for 5 straight quarters as online advertising revenue streams slowed and consumers and businesses reined in spending.
Rising job layoffs have been one of the hot topics for tech stocks across the earnings period. The sector which over-hired in the boom period now needs to rein in costs as demand normalises.
But there are reasons for optimism
It’s not all doom and gloom. On the surface, tech earnings are disappointing, and job layoffs raise concerns over the outlook for the sector. However, there are pockets of optimism as the sector evolves to a new higher interest rate reality:
1) Efficiency
Since the start of last year, over 283,402 employees have been laid off at tech-related companies. Just this year, so far, 120,000 jobs in tech have been slashed. This follows 50,000 tech workers being axed in November 2022 alone, including 11,000 at Meta and 10,000 at Amazon.
However, cutting staff, projects, and resources in areas that are not performing or at least supporting a decent operating margin doesn’t seem like such a bad idea. In fact, it would appear that becoming more efficient is a trait that Wall Street actually celebrates.
Meta is a prime example; after earnings and Mark Zuckerberg hailing 2023, the year of efficiency – in other words, a year of layoffs and spending cuts - the stock price rallied. Just this week, Meta announced plans for further job cuts, and once again, the stock price rallied on the news.
Zoom is another example where cutting staff and creating efficiencies has been seen as a positive move. The video communications firm rallied following its earnings report, which also detailed a 15% headcount reduction. Revenue is set to rise just 1% compared to 355% growth in the pandemic.
2) Improving margins
Salesforce provides us with another example of improving efficiency, boosting the outlook for the stock and lifting the share price. Salesforce posted better-than-expected earnings and following a 10% cut to the workforce in January, operating margins were revised higher for 2024, above analysts’ expectations.
Salesforce chart
Source: TradingView / FlowBank
Given that the tech stocks, also referred to as growth stocks, are not seeing growth, or see just marginal growth, efficiency and profitability are the next best thing. As Mark Zuckerberg said last month “It’s hard to really crank on efficiency while you are growing so quickly… we’re in a different environment now.” That environment is one where productivity, cost control and margins matter.
3) Buybacks
Earnings season also showed us that Biden’s threat to quadruple tax on stock repurchases of 1% -4% have fallen on deaf ears. Tech firms have ramped up the pace of share buybacks at an impressive rate as they attempt to stay on the Street’s good side.
Facebook announced plans to lift its stock buyback by 40% to $40 billion. Paypal announced plans to buy back $15 billion of its own shares, and even Elon Musk has mentioned a potential share buyback program.
4) AI
The excitement surrounding ChatGPT has seen artificial Intelligence thrust into the limelight this earning season as a key growth business, and one is seeing strong appetite from investors.
Microsoft rallied hard on the news that it bought a $10 billion stake in Open AI. NVIDIA surged after raising its guidance thanks to AI chips, reflecting a growing appetite from investors to have exposure to AI and AI stocks.
Chipmaker NVIDIA has been labelled a leading AI enabler as its chips are at the core of AI development. Furthermore, NVIDIA has estimated that its total addressable market in AI comes to $600 billion.
Better-than-expected earnings and an upbeat outlook from AI software maker C3.ai saw the stock explode higher. For fiscal Q3 C3.ai posted revenue of $66.7 million, ahead of the $64.3 million Wall Street forecast. Meanwhile, losses narrowed to $15 million. The company said that it expects to be profitable by the end of fiscal 2024, and with the firm’s high gross margins, this looks achievable.
There is no denying that the AI frenzy has swept through the markets, and the current landscape is full of potential opportunities for investors; we could be looking at a pivotal moment for tech and AI tech stocks. However, it is worth keeping in mind that it is unlikely to be plain sailing, computers were meant to take over driving, and that idea has stalled.
In conclusion
Despite disappointing earnings and job cuts dominating the headlines across earnings season, there are clear opportunities arising from the changing environment. A new era of efficiency is replacing rapid growth, share buybacks are rising, and AI development must stay on the radar.
