What to Watch From the 'Magnificent Seven' Tech Earnings

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Bloomberg Apr 23 03:43 · 22.3k Views

Stefan Slowinski, BNP Paribas Exane global head of software research, discusses what investors will be focusing on during the tech earnings season. He speaks on Bloomberg Television.

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Transcript

  • 00:00 Everyone has sort of looked at these companies as kind of the ballast for this market.
  • 00:04 As much as we kind of see folks trying to rotate into something different,
  • 00:08 the cash generators still fall into this space here.
  • 00:11 Are we going to continue to see that type of dominance that we've seen over the past few quarters?
  • 00:17 Yeah.
  • 00:17 Ryan, thanks for having me.
  • 00:18 And I think it's important to differentiate within the Magnificent 7.
  • 00:22 So you know, when we're looking at more the software side of things with
  • 00:25 Microsoft and Meta and and Alphabet and, and even Amazon, these companies
  • 00:30 are still trading on relatively reasonable valuations, obviously have very high cash flows
  • 00:34 and they're all taking steps to deploy that
  • 00:37 either through CapEx to generate future returns.
  • 00:40 We also think we could see a lift in buybacks.
  • 00:42 We should maybe get Alphabet with 60 billion this quarter, this week,
  • 00:46 maybe even Amazon announcing 1 and even some new dividends coming through.
  • 00:50 So we're starting to see more of that cash flow, you know, coming back to shareholders, which is also helping valuations.
  • 00:55 What are you going to mainly be looking for out of this batch of earnings here?
  • 01:00 It's not just about the numbers.
  • 01:01 I know there is a broader narrative, whether it's around AI or some of the other big tech transformations taking place here.
  • 01:07 What's going to be most important to you?
  • 01:10 Yeah, I think this week investors are going to be focused on three things.
  • 01:13 One is cloud computing.
  • 01:14 I know we talk about it every quarter, but Microsoft Azure, Amazon Web Services, Google Cloud, are they continuing to re accelerate?
  • 01:21 Are we seeing that AI demand actually coming through and that CapEx converting
  • 01:25 into revenue for these companies?
  • 01:27 The second thing is on the digital advertising side, we saw better data points as we went through the quarter.
  • 01:32 So we can see that reflected in Google and metas numbers.
  • 01:36 Those fundamentals are important because growth will slow, comps are getting tougher.
  • 01:40 So we want to make sure that the fundamentals are still intact.
  • 01:43 And the third thing, as I mentioned before, is capital allocation.
  • 01:45 Are these companies still being prudent
  • 01:47 about investing?
  • 01:48 Are they going to be paying more in terms of buybacks and dividends?
  • 01:52 And could M&A creep in?
  • 01:53 We've heard a few reports, obviously
  • 01:56 from Alphabet to Salesforce, considering M&A.
  • 01:58 Is that something that's really on the table?
  • 02:01 What do you think is
  • 02:03 setting the stage for the biggest rooms for surprise?
  • 02:06 You know, we were talking about valuations here Stefan, but the reality is you can look at it two ways.
  • 02:10 Either it's cheapened enough for a buying point into these earnings or they're fairly valued after that sell off.
  • 02:17 What what is the starting point?
  • 02:20 Yeah, I think there's a couple things to focus on.
  • 02:22 You know, the first thing is just the healthy of the the demand environment.
  • 02:25 So we just completed our quarterly
  • 02:27 B&P Paribus software reseller channel checks.
  • 02:30 Demand appears to be what we would call rolling along the bottom,
  • 02:34 not really getting much better.
  • 02:35 It's not really getting much worse.
  • 02:36 It's kind of, you know way down on where we were at the beginning of 2022.
  • 02:40 But are we seeing more signs of green shoots coming through and things may be improving
  • 02:44 as customers start to look out, you know
  • 02:46 towards those potential rate cuts coming?
  • 02:49 And then secondly, like I said on the efficiency front, how serious are these companies about sticking to it?
  • 02:54 We think these companies are operating a kind of one in, one out policy right now, which is they are still hiring, but they're also still being prudent and they are still trimming in places.
  • 03:02 So investors are going to want to see that, you know, they'll be prudent on these investments and margins will continue to come through.
  • 03:08 While you have such a focus on earnings this week, we have to remember that we are still week and a half away from a big Fed meeting as well.
  • 03:15 Are any of these stocks immune
  • 03:17 to a higher for longer interest rate environment or do you still see them as highly
  • 03:22 vulnerable to it?
  • 03:25 It's interesting that, you know, despite the IGV, the software ETF underperforming this year, you know, we've gone from expecting six or seven rate cuts to to maybe two.
  • 03:34 And and Despite that, you know, we still have Google up 10%.
  • 03:37 We still have Microsoft up, you know, almost 10%.
  • 03:40 So I know there's been a bit of rotation in the market, but you know, these companies at least
  • 03:44 have demonstrated that they can continue to perform
  • 03:47 partially because you still have
  • 03:48 reasonable free cash flow yields from some of them.
  • 03:51 I think the the Fed cuts and, and
  • 03:53 you know, the anticipation of our rates are going or weighing a bit more on
  • 03:57 some stocks like Snowflake or or Databricks or Mongo DB.
  • 04:01 You know, more of that kind of unprofitable side of things, especially when you take into account stock based comp.
  • 04:06 So they're going to be a bit more sensitive to any disappointments there on the right side.
  • 04:10 And finally, Stefan,
  • 04:12 how much does
  • 04:13 some of the dollar and FX headwinds at all play into this?
  • 04:16 We've seen a couple of companies
  • 04:17 already report and basically say, look, this has been an issue for us given the renewed dollar strength.
  • 04:22 Is this something that could be a factor as well?
  • 04:25 Yeah, absolutely.
  • 04:26 It's something people, as you said, are just starting to talk about remain, which is as we get into Q2 and Q3, we could see the year over year headwind from the dollar.
  • 04:33 These are global companies.
  • 04:34 They all have more than 50% of revenues outside the US.
  • 04:37 So you know, you talked a bit earlier about earnings growth.
  • 04:40 A lot of these companies had big restructurings in the first half of last year, lots of charges.
  • 04:45 Obviously this you don't have that.
  • 04:47 So you know we're getting the big earnings growth this year off of those big restructuring charges last year.
  • 04:52 You don't get that going forward from here.
  • 04:54 You also could see some FX headwinds as you pointed out, these are a bit mechanical in nature.
  • 04:58 What we're really looking at is.
  • 05:00 It's the strength of underlying demand
  • 05:02 and that appears still to be quite healthy.