Tech themes in focus ahead of earnings next week

Meta, Amazon, Alphabet, Amazon — all the major tech players are set to report earnings next week. What are some key themes to keep in mind when listening to earnings calls? Paul Meeks, Independent Solutions Wealth Management Portfolio Manager, admitted he would "be a little hesitant to buy any of these stocks, even ones with sterling fundamentals." Meeks said he is probably most bullish on Meta, referencing the payoff of its "year of efficiency" while highlighting AI hype, the e-commerce landscape, and semiconductor competition from the other Big Tech names.

This post was written by Luke Carberry Mogan.

Video Transcript

- Which tech company is perhaps positioned the best?

Paul Meeks, Independent Solutions Wealth Management Portfolio Manager, is joining us now.

Paul, it is fantastic to see you.

I can think of no better person to talk to going into these big tech earnings.

So I know we're going to kind of get into the details of each.

But my big overarching question is, if I'm an investor, who am I buying going into these numbers?

PAUL MEEKS: So first of all, I'd be a little bit hesitant to buy any of these stocks, even the ones with the Sterling fundamentals, because they've done so well so quickly in 2023, and maybe the fundamentals don't match the stock prices.

However, if you are going to peel back the onion and you take a look at the major tech players announcing next week, I'm most bullish on Meta.

- So let's talk Meta, because we saw their starting to rise after they announced their year of efficiency.

Investors, I mean, at that point, still really hadn't seen enough to sink their teeth into.

What do you think is separating Meta from the pack right now?

PAUL MEEKS: Well, first of all, Meta with the year of efficiency has taken a lot of cuts out of the system, draconian cuts.

And I expect to see more progress there inflating the operating margin.

And the company already comes to the dance with a pretty high operating margin.

But when you take a look at some of the other things, whether it be in artificial intelligence or if Apple ends up selling some day in the future the Vision Pro headset for $3,500, I think Meta is going to sell their couple hundred dollar version of their own headset in a big, big way.

And so the key thing with Meta will be, what's going to happen with digital advertising?

Because that's still the driver of the company.

And if we do have a recession, which I do predict will be next year, even though I think it will be short and sweet, what kind of impact on the legacy business will that have?

In the meantime, tell me more about the year of efficiency, continuing operating cuts-- there might be more to come.

What are you doing in AI?

What are you doing in augmented reality?

And the nice thing about Meta, it actually has for the first time in a couple of years, some real, tangible, positive catalysts.

And in the meantime, even though the stock's up quite a bit in 2023, it was down so much in 2022, I think that there's upside on the stock.

I don't think the stock is particularly expensive.

- Paul, you mentioned AI.

What are you looking to hear from, whether it's Microsoft or Alphabet, on that front?

Where's the meat that you're looking for?

I mean, that was a big theme the last round of earnings from these tech giants.

PAUL MEEKS: So the last round of earnings, they essentially talked about, I'm doing it.

Right, ChatGPT is unveiled last November.

First conference call in, companies are saying, yeah, I'm embracing that theme.

Now what I need to see are some tangible benefits that are going to positively impact these companies' P&L.

What are they doing specifically?

How are they going to monetize it?

And when they monetize it, when do we start to see the goodies?

Because everybody can talk the marketing spin, but I need to see some tangible impacts on the P&L.

You better give it that to me.

At least guide to it for the next couple of quarters, because I'm going to start to believe that it's all smoke.

- And to that point then, at what point do we expect to see the shakeout here?

Because obviously we're still seeing a lot of these sort of micro developments with Microsoft and with Google here.

But at what point are we going to see a shakeout where we can actually say, look, these are going to be the ones really taking the lead here for the next few years on AI?

PAUL MEEKS: You know, that's the ultimate question.

And I think back to when I was managing big tech funds for Merrill in the inflation of the internet bubble.

Late '90s, early 2000s.

Alls you had to do, whether you were a tech company or not, is just call yourself dot-com, and some companies did that.

And you had an initial push.

But then over time, you do have some mega companies that benefit from the trend.

And then you have some that spun it like a top and then just everything came out of it.

So I think AI is such a new topic.

I think that investors will give these companies the benefit of the doubt.

But we'll need to see some real concrete benefits.

But I don't think you should expect that in the next couple of quarters.

It's probably a 2024 phenomenon.

Then you'll start to see the strong get stronger, and then some other companies fall by the wayside.

- Well, that sounds realistic in terms of timeline, right?

Not waiting for that profit right away.

The goodies, so to speak, that you spoke of, Paul.

But do you think most investors have that realistic expectation?

In other words, if these companies don't come out and do what they did last time and paper over their call with AI, are they going to be punished, or do you think that the market has kind of taken a breath on this a little bit?

PAUL MEEKS: I think it's the former.

And I'm a little bit worried about it, right?

Because the underpinning is, yeah, the NASDAQ is up 30%.

The Dow is flattish.

And so you've had a real cascade upward of these tech stocks.

And that really had a lot to do with AI, and also a lot to do with people believing that the Fed was very close to peak interest rates.

And then next year when start to lower interest rates to normalize them, then tech and aggressive growth stocks love that more than anything.

But I do think there'll be some pressure on some companies on these calls-- and you even saw with the negative reaction to Netflix and Tesla, who had otherwise pretty good quarters.

But when the stock is priced where it is, if there is one fly in the ointment, and we might have some flies in the ointment when we start to see these companies report, I worry that they won't have a big dropback.

But I do expect maybe a slight correction, kind of a la Netflix and Tesla the last couple of days.

- Interesting.

One thing-- one company we haven't talked about with regard to this tech space is Amazon.

What are you expecting from Amazon?

What are you looking for?

Whether we're talking about AWS, just e-commerce in general.

What are you expecting, Paul?

PAUL MEEKS: You know, the key thing is AWS, right?

It doesn't really matter what the revenues are, it matters where the profits come from, and they overwhelmingly come from AWS.

The problem is AWS, not just for Amazon but for the entire cloud infrastructure industry, has come down quite a bit.

Right, the growth rates have really slowed.

What I need to see is a reacceleration or comments from management in the Q&A portion of the call as to when AWS revenues are going to reaccelerate.

Because the industry has been slowing down, and unfortunately, AWS has lost market share in the last couple quarters to Oracle, Google, and some of the other major players, like also Azure.

So we'll see.

They gotta rebound that AWS growth rate, because that is the driver.

I don't know if the e-commerce stuff matters that much.

- And Paul, we have to talk TSMC.

Obviously, what's going to be powering a lot of the growth that we're expected to see.

And then we saw sort of that warning there about demand here.

What are you making of that?

Is that the canary in the coal mine?

PAUL MEEKS: I think it's very important, right?

Because TSMC is the world's most important semiconductor company.

When it comes to the advanced chips, they do it all.

Overwhelming global market share.

And to say that they have to trim back their revenue expectation, I think that's significant.

Yes, they will have an AI push.

And because NVIDIA manufactures their TSM, huge positive.

But in the meantime, consumer electronics, things like the iPhone, particularly if we do enter a recession, there will be less spending.

And that will be a pretty stiff headwind.

Not maybe countervailing the tailwind, which is AI.

But definitely there's going to be a mix, and you can see that, you know, it's not all rosy just yet.

But long term investors, you know, that's a marquee company.

The only thing you probably have to worry about with that one long term is, do the Chinese decide to take Taiwan?

And then that would be an issue.