This article was originally published on Forbes on Forbes Forbes on Oct 19, 2023,10:47pm EDT
Earnings season has officially kicked off, with Big Tech headlining a busy week next week: Microsoft and Google report on Tuesday, followed by Meta on Wednesday, and Amazon on Thursday. Big Tech stocks have seen their dominance over the broader indexes soar this year, with the Magnificent 7 reaching nearly 30% of the S&P 500’s weighting, higher now than at its peak in 2022 and up from 20.0% at the beginning of this year.
In the Nasdaq 100, the combined weighting of Big Tech stocks is even higher, at 44.8%. The Nasdaq 100’s rebalance earlier this year in July dropped the overall weighting of the group from 55% to ~38%, but already, we’ve seen a 6 percentage point increase in just over one quarter.
This outsized influence that the Magnificent 7 has over the indexes is just one of the many reasons that Big Tech earnings reports next week will be some of the most closely watched this season. EPS estimates for the group will be in focus – estimates have all pushed higher during Q3, with Amazon, Meta, and Nvidia seeing some of the largest increases, and investors will likely be assessing how the group stacks up against heightened expectations.
View Post: Click HereView Post: Click HereClick Here
Sign up for I/O Fund's free newsletter with gains of up to 221% - Click hereClick hereClick here
Microsoft: AI to Help Drive A ‘Noticeable Acceleration’ This Year
For Microsoft, a noticeable acceleration is expected this year, with revenue growth accelerating back to the low-double digits through FY25. For the quarter, revenue growth is estimated to be about +8.8% YoY to $54.5 billion, with EPS forecast to grow +12.6% to $2.65. Revenue growth is currently forecast to return to +10% to +12% growth over the next three quarters through calendar Q2 2024.
Source: SEEKING ALPHA
Azure and AI will be two of the key areas to watch, given the overlap between the two. Microsoft is devoting 13% of Capex to AI in 2023, the most among the top cloud service providers.
Azure’s growth in the prior quarter was 27% in constant currency, including about 1% from AI services, a decline from 31% two quarters ago. Excluding currency impacts, growth slowed to 26% from 27%, hinting at a possible inflection point back to higher growth.
Source: MICROSOFT
Microsoft also stands to benefit from its consumption pricing model for OpenAI’s APIs, given that the APIs are all new workloads for Azure this year. Microsoft said last quarter that it had “great momentum across Azure OpenAI Service” with around 100 customers added each day, bringing total customers to more than 11,000.
In addition, commercial subscriptions for Office 365’s Copilot AI assistant are expected to start on November 1, at a $30 per month per user price point, opening up a potential multibillion-dollar revenue opportunity over the next few years, with the first insights likely to come next quarter.
Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more hereLearn more here.
Alphabet: Search & Cloud Momentum to Continue
Like Microsoft, Alphabet is expected to see revenues reaccelerate to the low double-digits through Q2 2024, a marked acceleration from forecasts at the beginning of the year. Revenue for Q3 is forecast to rise +9.6% YoY to $75.7 billion, with EPS growing +36.0% YoY to $1.44.
Source: SEEKING ALPHA
The combination of resilient Search growth, strong Cloud performance, and the integration of AI into Alphabet’s services is driving revenue growth expectations higher. Forward revenue growth rates for the next two quarters have risen upwards of 2 percentage points since the beginning of the year.
Source: SEEKING ALPHA
Search and Other advertising growth is picking up, rising 5.4% QoQ to $42.6 billion, as Google begins “building the next major evolution in Search” with AI integrations driving a higher ROI. As the I/O Fund highlighted previously, Alphabet’s Search “has proven resilient because it provides advertisers an attractive ROI on their ad spend. Looking ahead, Search Generative Experience, [Google’s generative AI-powered search tool], will improve advertisers’ ROI and will likely provide Alphabet additional pricing power. This will also improve their retail vertical” – a trend already surfacing, with Q2’s Search growth driven by retail alongside SGE’s launch.
Google Cloud will also be under the microscope, after posting two consecutive quarters of operating profitability, with operating margin reaching almost 5% last quarter. Revenue for Cloud stabilized at 28% growth YoY in both Q1 and Q2, as the platform remains a leading choice for training generative AI models. As enterprises start to think more deeply about AI and integrating AI across their organizations, Google Cloud stands to benefit in multiple ways – via its large language models such as Bard, its generative AI offerings including the recently launched Duet AI, offering AI model training with multiple AI supercomputers, and by “expanding our total addressable market and winning new customers,” according to CEO Sundar Pichai.
However, Google is in the midst of its antitrust trial, with regulators concerned that Google has been keeping an illegal monopoly on search. Google is reportedly paying Apple nearly $20 billion per year to remain the default search engine on Apple’s devices, are at the forefront of the case.
