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Tuesday, February 7, 2023

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Alphabet, Microsoft Lead Bear-Market Earnings Season

Investors are entering a historic year for some of Wall Street’s most influential technology stocks.

Investors are facing a make-or-break week for some of Wall Street’s most influential technology stocks in a historic year for the group marked by a dip in bear market territory.

The superlatives followed one another in the wild ride of 2022. Shares of Meta Platforms Inc. have lost 61%, the biggest drop since the company went public a decade ago. Apple Inc., Alphabet Inc., Amazon.com Inc. and Microsoft Corp. are facing their strongest declines since the global financial crisis.

The Nasdaq 100 index rose 0.6% on Tuesday.

Now, these companies are slated to report quarterly results this week, with forecasts showing a decline in earnings by the most in at least three years. The five stocks collectively comprise about 40% of the weight of the Nasdaq 100 index, which has lost $6 trillion in value this year due to massive rate hikes by the Federal Reserve and the growing potential of a recession.

“They are undoubtedly essential to sentiment around technology,” said Neil Campling, an analyst at Mirabaud Securities. “Investors are now focused on results and want evidence of lower costs, disciplined spending and not chasing revenue growth at all costs.”

Here’s a look at the Big Tech stocks that will be reporting this week and what investors are watching.

Alphabet

Investors are concerned about the strength of the advertising market in a weaker economy, a theme underlined last week by Snap Inc.’s weak growth. However, analysts are still forecasting full-year revenue growth of about 12%, slightly ahead of the S&P 500, which also expects double-digit gains over the next three years.

Any sign after the market closes on Tuesday that those predictions are too optimistic could send the stock lower on a different leg. Keybanc Capital Markets lowered its estimates for its Google parent company on Monday and is now forecasting a revenue increase of just 5% for the year.

The stock’s weakness has arguably made Alphabet a bargain as it trades at just 17 times estimated earnings, a discount to the 10-year average and the Nasdaq 100 overall.

Microsoft

The software giant, also reporting after the closing Tuesday, is trading at 23 times earnings, a slight premium to the average of the past decade.

While demand for its cloud and enterprise software products is expected to be sustainable even in the face of a recession, analysts’ forecast quarterly revenue growth of 9.4% would be the slowest pace since 2017.

“The big question mark is: what impact will Microsoft see from the slowdown in the economy and the weakness of the PC?” Wiley Angell, chief market strategist at Ziegler Capital Management. “However, given the overall stability of earnings and the stock’s valuation, I think now is a good time to evaluate it.”

Metaplatforms

After a stock drop that wiped $579 billion of Meta’s value this year, some investors would like to hear Mark Zuckerberg announcing Wednesday’s earnings that he’s cutting back on spending on the company’s push into the metaverse. That expensive gamble has yet to generate meaningful income at a time when investors are focused on cutting costs.

The Facebook parent has been besieged by slowing user growth, competition from TikTok, and an Apple privacy policy that has reduced its ability to target ads. It also faces the same weak ad market that pressured Snap.

Full-year sales are down 0.7%, making it the only company of the five expected to report a decline. This will also be the first year of declining revenue in the company’s history. Meta-shares are trading near their lowest-ever level, but that wasn’t enough to tempt bulls.

Amazon.com

Amazon reports Thursday afternoon, and the report will be examined as a benchmark for all sectors. The e-commerce business will shed light on consumer strength, especially in the pre-holiday shopping season, while Amazon Web Services’ cloud computing division provides a glimpse of how IT spending is holding up.

Investors will likely focus on Amazon’s progress in cutting costs, given its recent preference for profitability over growth. Amazon is trading more than 40 times the estimated profit, more than twice the Nasdaq 100, albeit below the long-term average.

Amazon is the top idea of ​​JPMorgan Chase & Co. among internet equities and considers the valuation attractive. While analyst Doug Anmuth sees some risks — including currency headwinds and slowing discretionary spending — he writes that it “will be a cleaner story through 2022 as revenue growth accelerates again and corporate profit margins expand through 2023.”

Apple

The iPhone maker was the relative winner of 2022, down 15%. Investors have been drawn to it as the fort’s steady growth and strong balance sheet give it a perceived safe-haven status.

However, this could leave the stock vulnerable when it reports Thursday. Bloomberg News recently reported that it is pulling out of plans to increase production of its new iPhones given demand trends. The stock also trades at 23 times future earnings, both above the long-term average and the market in general.

“Apple certainly doesn’t look like it will be priced in for a recession, and the multiple may be challenged in the near term, given what we’re hearing about the softness in the market,” Angell said. “However, earnings stability should continue to result in stability in the stock, while providing a higher multiplicity floor.”

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