Bajarin highlights two main concerns: "Who's getting the most beneficiary lift from AI stocks?" and "Do we have outsized expectations of AI growth?" However, he believes tech earnings will see strong growth due to AI infrastructure investments. Bajarin expresses worry about potential volatility stemming from "the bubble-ish cycle of AI." He also notes that costs associated with AI innovation could be a factor affecting earnings.
Morgan emphasizes that if investors look beyond the AI hype, Big Tech is "looking at very strong growth" across the core business models. While companies like AMD (AMD) and Nvidia (NVDA) do have substantial profit growth fueled by AI, Morgan notes that for earnings from names like Microsoft and Meta there won't be "a huge AI effect, in terms of like 30% growth coming from AI, but their core businesses are very strong." He adds that if the Federal Reserve were to refrain from cutting rates and inflation remains elevated, these tech giants "are delivering growth regardless of what the Fed is doing."
We're joined now by Dan Morgan, Synovus Trust Senior Portfolio Manager, and Ben Bajarin, CEO and Principal Analyst of Creative Strategies. Guys, it is good to have you both on the show. And Ben, I'll start with you. Maybe kind of an unfair question, Ben, but tech earnings. And obviously, we talk about tech. It's a lot of verticals, a lot of subsectors. It's online advertising and semis and cybersecurity, Ben. But give me your general take on this tech earnings season, Ben. Is it going to be positive for tech investors? Do you see as a catalyst?
So there's been some instances where companies have actually had fairly good growth and then on top of that, had a little bit more volatility on their stock because, again, their expectations for those earnings or for a particular business units revenues was just higher than was what was realistic. And so for me, looking into this, I think we're going to have some strong quarters, particularly on the back of cloud growth compute, the AI infrastructure that we're in particularly around Microsoft and Google. But I'm not sure that necessarily translates into the predictable things we've seen before, just because I'm worried about the bubble-ish cycle of AI and really where those valuations should be and some volatility relative to these stocks as well that we haven't quite seen before prior to this AI bubble.
ALEXANDRA CANAL: And Dan, I want to get your thoughts on that as well. Do you think that AI will be able to continue to insulate big tech from higher rates in some of these other market risks?
DANIEL MORGAN: You know, Allie, if we strip away the whole picture and just kind of gum into these upcoming reports that we have, I mean, the percentage of revenues that, for example, let's say, a Microsoft is expected to get next year from AI is about 5% to 7%. It's not a huge number. So if you kind of go back to these businesses in terms of their core, you know, how they've gotten to where they are today. We're looking at very strong growth.
We had a couple of muted quarters about four or five quarters ago. But like, you're heading into Meta, they're expected to grow at a rate of about 25% year-over-year and earnings on this quarter. You look at Microsoft, it's going to grow around 15, and you're looking at Alphabet at about 13. So we keep talking about AI. And yeah, it has a big impact on, let's say, Netflix or Nvidia and AMD in terms we can actually see huge amounts of profits coming down.
But these three companies we're going to talk about today in terms of earnings, we're not going to have a huge AI effect in terms of like 30% growth coming from AI. But their core businesses are very strong.
JOSH LIPTON: Ben, sticking with the AI, these big tech names that are going to report, Ben, have put a lot of money and time and effort into this tech. And I'm just curious, Ben, when you look at, let's say, Microsoft or Amazon, Alphabet, are some of those names, Ben, are they showing perhaps greater traction than others in this story?
BEN BAJARIN: Yeah. I mean, I think, again, you just look at the hyperscalers. Obviously, Amazon has been a huge cloud provider. I think they're the one in market share in terms of overall cloud instances. Microsoft's there second. I think they've got a little bit of an edge on the AI story.
The hard part about this is we don't entirely know all of the ROI yet for the industry and how expensive it is to run deploy and put software on a host of their innovations around AI. And obviously, they're all spending a lot on silicon from Nvidia, they're doing their own custom silicon. These are expensive. So we want to see how that's monetized.
But there's obviously a huge rush here in terms of cloud growth, which, again, I think you'll see from all of those names. But you know, like I said, I keep coming back to-- are we in a cycle where some names were more valued or more of that speculative growth was priced in, and now we're seeing some rebalance of that? And how people react to the growth. That, again, I agree with Dan. I think we'll see is where I'm again. I'm just not sure just because every investor conversation we have at the moment is still very focused on how big is AI, what share will they have, and how big is this growth rate in this overall TAM expansion coming to the industry because of AI.
ALEXANDRA CANAL: So given the focus on AI, Dan, let's say the Fed does not cut rates this year. Do you think that has any impact on any of these tech names at this point?
DANIEL MORGAN: What's interesting, Allie, because we had a big run-up in tech, you look at Netflix last week, and then they've kind of leveled off. And a lot of that's been due to what has happened in regards to the recent inflation data that we got in terms of core CPI and the expectations for the Fed funds rate. I think at the beginning of the year, we're at three to four decreases. Now those expectations have maybe gone to one to two.
And we know, Josh and Allie, that the tech sector traded in unison with the Fed on the downside when rates are going up. So by extending this period of time until we supposedly get a rate cut, I think that's actually kind of had these companies roll over a little bit.
But with that being said, Josh and Allie, we look at the growth that's coming out of tech right now going into this first quarter. I mean, S&P consensus is 20% growth year-over-year. We're looking for 70% growth year over year out of the chip sector. So they're delivering growth regardless of what the Fed is doing, even though they've got rates at 5 and 1/4 or 5 and 1/2.
JOSH LIPTON: And Ben, I want to get your take on Apple as well. Listen, they're not reporting this week, but they are on deck. And there's a stock Ben that's been under pressure it's down about 13% so far this year. It's concerns about the company's AI strategy. It's the China business. It's the regulatory scrutiny. I'm curious, Ben, when they report, what do you expect to hear from Tim Cook's company?
BEN BAJARIN: Yeah. I mean, I think they're going to address some of the softness in the market that's definitely happening. I mean, obviously, the big question around, what can we expect in terms refresh rates? The smartphone cycle, the PC cycle the device cycle as a whole has been elongated. Their point about what they could do in AI, and this is true of a lot of companies that see stalling hardware sales, is just whether or not that strategy, whatever it is, is going to lead to any increase in sales or start to pick up the refresh cycle. I'm still skeptical that that's the case until we see it.
But I think right now, I think there's a hope that they'll at least be flat to moderately up year-over-year in the June quarter. I think it has become a bit more of a question now leading into the second half of the year. But clearly, the main point is there is softness. That softness is hitting them. That's being priced into their stock. And so the extent of that I think is what we'll wait to see when they post earnings and with the on-call commentary.
ALEXANDRA CANAL: And Dan, we talk a lot about the Magnificent Seven. But are there opportunities within tech outside of those names that investors should be exploring?
DANIEL MORGAN: Allie, we've actually seen strength really spreading throughout tech. It's not just been those big names that everybody knows. I mean, you look across the board, you know, I talked earlier about chips in terms of expected growth on this upcoming quarter. We've had good strength in that group. We are seeing some strength in enterprise software, not as much as we would hope.
But it's definitely been spread out much more than it was, let's say, a year ago when we had the big move up, and it was all NVIDIA and all the big names, and then everybody else was kind of left behind. I have noticed that within the tech sector, it is spreading out to these other groups. So I think there's still a lot of good opportunity in tech going into this quarter and going into the remainder of the year regardless of what the Fed does.
JOSH LIPTON: Dan, Ben, thank you guys both so much for joining the show today. Appreciate it.