Into the Confessional

Hi everyone, stock junkies had plenty to chew on this week.

Before we dive in:

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We’ve been riding high on the AI wave as sentiment continues dominating short-term stock market swings.

Nowhere is this more prevalent than with the megacap tech stocks. The camp is firmly divided into the have’s and have-nots, as Apple (-12%) and Tesla (-31%) have struggled year to date while Nvidia (+67%), Google (+22%), Amazon (+14%), Meta (+24%), and Microsoft (+12%) have had a solid start.

This week, several of the MAG7 entered the earnings confessional. While some are making the case to rename this group the fab 5, we had some divergent earnings reports.

Before we get into the reporting companies from this week, a critical chart that everyone was passing around is this one:

This chart shows how growth was heavily dominated by the tech giants in the first half of the year. However, we can see the catch-up from the rest of the market in the second half. This has left many analysts calling for a “rally of the rest,” as the market rally should broaden.

This, against the backdrop of ever-dropping forecasts of rate cuts and stubborn inflation, makes for an exciting earnings setup.

This week, amongst the majors, we had Tesla, Facebook, Microsoft, and Google.

Tesla

Overview: Everyone was expecting the worst, and it was almost as bad as people were expecting. This probably made the stock go down, right? Wrong. In a market-driven directly by narratives, Musk, the soothsayer, got on the call to ease investors by accelerating the roadmap on the lower-cost mass adoption model, which was previously thought to be delayed. This, paired with the robotaxi and fully autonomous narrative, was enough to mask the terrible numbers, price cuts, and struggling demand, as the stock rallied 13% after the print.

By the Numbers:

• Revenue of $21.3B missed estimates by 4.3%

• YoY Auto revenue growth declined 12.8%

• Cars Delivered declined 8.5%

• ADJ EPS of $0.45 vs. Estimates of $0.52

• Operating Income of $1.17B vs. estimates of $1.53B

• FCF of -$2.53B vs. estimates of +$653.6M

• Gross Margins of 17.4% vs. Estimates of 16.5%

Meta

Overview: The setup into the print for Meta was very difficult. Expectations were sky-high, with the stock up 40% YTD in the print. And like a demanding parent who scolds their kid for getting 99% instead of 100% on their math test, the market punished the stock. The main concern about the stock was the forward-looking revenue (guidance) and increase in spending. Meta bumped up the CAPEX projection 2024 as they continue accelerating their infrastructure investment to support their AI roadmap. But the quarter itself was OK, If not great… Revenue grew 27.3% YoY, the highest growth the company has seen since Q3 2021. Still, this shows you how much of a narrative-driven market this has become, as the stock closed down 11%, shedding $132B in market cap on the day after the print.

By the Numbers:

• Revenue came in at $36.5B vs. Estimates of $36.1B

• Guided for 2Q revenue of $36.5B - $39B, vs estimates of $38.2B

• EPS of $4.71 beat estimates of $4.30

• Family of Apps operating income of $17.66B vs estimates of $17.76B

• Reality Labs operating loss of $3.85B vs. estimates of a loss of $4.51B

• Raises 2024 CAPEX to $35B-$40B, up from $30B-$37B

Microsoft

Overview: A great quarter from a great company. Microsoft continued its impressive revenue growth from a solid base, growing 17% YoY. Microsoft is one of the most directly monetizable companies from the boon to AI, saying that 7% of Azure's growth contribution came directly from AI. Satya highlighted that 65% of Fortune 500 companies use its Azure OpenAI service. Look for the three A’s from Microsoft to continue to boost growth: Azure, AI, and Activision.

By the Numbers:

• Total Revenue of $61.9B vs. estimates of $60.8B

• Cloud Revenue of $35.1B vs. estimates of $33.9B

• EPS of $2.94 vs. estimates of $2.63

• Azure growth accelerated to 31% vs. estimates of 28%

• Guides:

  • 4Q Azure growth of 30-31%

  • 4Q More Personal Computing Revenue $15.2- 15.6B

  • 4Q Intelligent Cloud Revenue $28.4-28.7B

Google:

Overview: Google is back, baby. Many pre-maturely proclaimed that its search business was dead in the water with the arrival of “AI answer engines” instead of “search engines.” This same crowd forgot that Google essentially invented this stuff (the transformer). Google put up a solid quarter on the back of intense search and YouTube numbers and reminded the market that they deserve to hang with the best of them. They also issued their first-ever dividend and bolstered their buyback. Returning capital to shareholders is always a good signal.

By the Numbers:

• Revenue came in at $80.5B vs. estimates of $79B

• EPS of $1.89 vs. estimates of $1.53

• Google Ad revenue of $61.6B vs. estimates of $60.2B

• Google also declared a cash dividend of $0.20/sh and authorized repurchase of up to $70B shares.

• Google Cloud revenue was $9.57B vs. $7.45B last year

Wrapping Up

With so much of the market being held up today by its top constituents, the mega-cap needed a solid quarter for the growth train to keep chugging.

We went 3/4 for this week. Meta struggled, Tesla went up despite terrible numbers, and Google and Microsoft reminded everyone just how strong of a business their cloud divisions are.

Next week, we get Apple and Amazon. But we have to wait for the golden goose. Nvidia reports earnings on May 22nd due to their Jan 31 year-end. Spending amongst hyperscalers continues to increase. Guess what they’re spending it on?

Maybe Jensen can perform another miracle by beating even these lofty expectations. Just…maybe…

Cheers,

The GRIT Alpha Team

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