Bernstein Analyst Mark Shmulik said-
“There are still so many questions as to where the bottom really is, When do things start looking good again? I don’t think anyone is expecting great numbers this quarter, but they’re definitely looking at guidance for next quarter and this year.”
Markets give little indication that tech firms just endured the industry’s worst year on record. According to Yahoo Finance’s Jared Blikre, tech stocks have soared so high in 2023 that they have propelled the Nasdaq 100 (NDX) into a brand new bull market.
Apple (AAPL) is up about 29% year to start as of this afternoon, Meta’s rocketed up roughly 73% year to date, and chipmaker Nvidia (NVDA) is the biggest winner, with a rise of approximately 87% in these first months of 2023.
Wells Fargo Analyst Michael Turrin said
“Tech is on pins and needles right now. The stocks have moved up, but the fundamentals don’t suggest we’re all the way out of the woods yet. Right now, the question is, ‘Have we turned the corner’? Was there more conservatism in guidance to start this year?’ If so, maybe we can get back to normal ….There’s going to be a lot of careful attention to what management teams say about the macro.”
Nonetheless, widespread optimism in the technology sector is more about the Federal Reserve than it is about technology per se, making for a risky position in which expectations may collide with a tougher-than-expected reality.
If everything goes according to plan, “tech is just going to rip.”
Although the tech industry took a beating from interest rate hikes in 2022, there is hope that the worst may be over. Whether or whether we’ve reached the bottom of the rate cycle, all tech firms are stuck in it today.
Andrew Boone, an analyst at Citizens-owned JMP Securities, said that the sector’s objectives and storylines would be defined by the Fed’s next steps, even though more established tech businesses like Alphabet (GOOG, GOOGL) would be less startled by them.
He said-
“If Powell starts to pause rates, or if we’re one hike away, all those tech stocks start to work. At the end of the day, I feel like we’re still in this macro cycle. If Powell continues to tighten, the focus will stay on profitability. However, if rate hikes slow and we’re at the end of the tightening cycle, tech is just going to rip.”
Tech companies’ focus has shifted in recent months to issues of profitability. How much money IT businesses have actually saved from the waves of layoffs they’ve been conducting over the past six to eight months is a largely open question, according to Boone. The question is how much the bottom line will improve as a result of a reduction in staff costs.
Boone said-
“We’re actually going to start to see that money that’s been saved from these layoffs.We’re actually going to see the numbers behind the cost discipline story, and that’s going to be one of the drivers of stock performance over the next six weeks.”
Watch out for these key areas
According to Shmulik of Bernstein, there are three additional crucial areas to keep a watch on as the earnings calls begin to come in. These areas are what firms say about the slowdowns in digital advertising and cloud computing, as well as how they talk about artificial intelligence.
He told Yahoo Finance-
“Digital advertising is a big theme, as is cloud, People are comfortable with digital advertising bottoming out, but are less so with the cloud. The question for both is: ‘How bad do the numbers get?’ Digital ad numbers seem to be in a rut but holding, and people expect the entire sector to recover. We’re not quite there for cloud, though, because the numbers keep going down.”
Companies like Amazon (AMZN) who have counted on long-term cloud expansion to support their businesses in general could face extinction as a result of this slowdown.
“There’s no safety to point to on Amazon, which is why the stakes are so high.”
Boone, Shmulik, and Turrin predict that discussions about artificial intelligence will play a significant role in this year’s earnings calls because of the ongoing AI hype cycle. However, much of the discussion we’ll hear for the time being will be just that.
“Most investors I speak to don’t have the conviction that things have really changed a lot,”“AI has been really encouraging because it allows us to think about the future. Stocks have moved up on this AI theme, but that’s not likely to right now move the needle in the immediate term.”
However, AI is a constantly evolving field in an industry where things have been all over the place.
Shmulik said-
“The mood has been that Meta is finally figuring out a lot of stuff, while we all of a sudden have questions about Google. Some of those questions are about this quarter or this year, but I’ve already started to get a lot of questions from investors about 2024.”
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