An important week in the first quarter earnings season just concluded, where tech giants such as Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Google parent Alphabet (GOOG , GOOGL), among others, reported their results, which affirmed the re-emergence of mega-cap Big Tech dominance in the stock market.
It’s not just Big Tech that’s shining, however. Out of the half of the S&P 500 companies have reported earnings thus far, close to 80% have surpassed Wall Street estimates. Despite the seemingly downbeat economic climate, that 80% beat rate is on par with the three-year average, dispelling some concerns about the likelihood of a deep recession. Investors have responded with strategic buying of equities, which helped put the Dow Jones Industrial Average on track to log its best monthly performance since January with an April gain of 2.2%.
The Dow on Friday gained 272 points, or 0.80%, to end the session at 34,098.16. The blue-chip index was powered by Intel (INTC), Apple (AAPL), Salesforce (CRM), Microsoft and Walt Disney (DIS). The S&P 500 gained 34.13 points, or 0.83%, finishing at 4,169.48, while the tech-heavy Nasdaq Composite added 84.35 points, or 0.69%, to close at 12,226.58. The Nasdaq was buoyed by the a better-than 2% rise in Tesla (TSLA), Nvidia (NVDA) as well as the aforementioned Big Tech powers.
For the week, the Nasdaq was the biggest gainer, rising 1% thanks to Microsoft and Meta, which impressed the market with better-than expected numbers. Once believed to be suffering as a results of TikTok, Meta demonstrated it can still grow its user base among its family of apps. What’s more, the company’s cost cutting efforts appear to be working as evidence by the strong bottom line beat. Will the be strong earnings growth trend continue throughout the entire Q1 earnings season? That remains to be seen.
While it’s still early, and more than half of the earnings season still remains, the outlook companies have provided so far suggests rising inflation and rising interest rates is not only manageable, but have possibly bottomed out where some companies have now emerged on the other side of the decline. Friday’s rally in stocks suggests investors are now more optimistic about the direction of the economy and the near-term and long-term impact of monetary policy decisions. Here are the stocks I’ll be watching this week.
Advanced Micro Devices (AMD) - Reports after the close, Tuesday, May 2
Wall Street expects AMD to earn 56 cents per share on revenue of $5.3 billion. This compares to the year-ago quarter when earning were $1.13 per share on $5.89 billion in revenue.
What to watch: Margin erosion and the cyclicality in the chip business have been two of the biggest headwinds for AMD over the past several quarters. Investors are anxious to see whether margin pressures have bottomed out and ready for expansion, and whether there are new signs for improved assets turnover, namely its Pensando and Xilinx acquisition. Despite these consistent headwinds, AMD continues to deliver strong operating results, suggesting that issues related to rivals such as Intel (INTC) are their own to deal with. AMD stock has risen 35% year to date, besting the 8% rise in the S&P 500 index. This includes a 50% surge over the past six months, while the S&P 500 has returned just 8.6%. Unlike its chief rival, AMD continues to demonstrate strong operating leverage given that it is able to grow profits at a faster rate than its revenue. The company last quarter grew revenue 16% year over year to $5.6 billion, driven by growth in its Data Center and Embedded business segments which offset weakness in Client and Gaming business segments. While AMD delivered a marginal beat on revenues, EPS fell short of expectations due to a sharp decline in global PC shipments. The Client business segment saw a 51% year over year drop in Q4. Assuming the company’s growth metrics rebound in Q1 and the management issues strong guidance, this would present a great buying opportunity for AMD stock for the next 12 to 18 months.
Moderna (MRNA) - Reports before the open, Thursday, May 4
Wall Street expects Moderna to lose $1.77 per share on revenue of $1.18 billion. This compares to the year-ago quarter when earnings were $8.58 per share on $6.07 billion in revenue.
What to watch: Can Moderna still provide healthy returns? Given that Covid-19 numbers have drastically declined across the globe, the assumption is that Moderna will struggle to grow revenue. Currently down 27% year to date, compared to the 8% rise in the S&P 500 index, Moderna shares have been punished over the past six months, including an 8% decline last week. As it stands, since reaching its December highs, its shares have lost 40% to the March lows. Moderna management is being tasked to demonstrate that the company can produce and sustaining operating profitability and growth beyond its Covid expertise, in which the company said it expects to generate $5 billion in vaccine revenue this year. The market, however, appears to have discounted this forecast, given the weak demand Moderna has seen so far for its boosters shots. According to Bloomberg, only 16% of Americans have gotten the latest round of shots targeting the omicron variant. Still, it’s hard to ignore the value in the stock price. The company’s product pipeline, which uses its messenger RNA (mRNA) technology, has several candidates that can come to market to sustain long-term growth, including drug development for influenza and HIV vaccine. So, while the stock price has been under heavy selling pressure, Moderna’s business fundamentals are still intact. The market will nonetheless want to hear what the company has to say on Thursday about its growth expectations for both the near term and long term.
Block (SQ) - Reports after the close, Thursday, May 4
Wall Street expects Block to earn 34 cents per share on revenue of $4.58 billion. This compares to the year-ago quarter when earnings came to 18 cents per share on revenue of $3.96 billion.
What to watch: Shares of Block have been under heavy selling pressure over the past year, falling some 40%, compared to a 1% decline from the S&P 500 index. So far in the first three months of 2023, the stock has moved sideways to slightly down, falling 3.5% year to date, compare to a 8% rise for the S&P 500 index. Originally called Square, and known for its peer-to-peer money-transfer service Cash App, the company rebranded its name to Block to present an emphasis on its shift towards blockchain technology. Although the company continues to buildout what it envisions as a decentralized finance business using cryptocurrency, the management expects Cash App, which is already used to buy and sell Bitcoin, to lead the new business. At the same time, the company has struggled with negative operating margins due to the integration of Afterpay acquisition, an Australia-based buy now, pay later company. The company notes that the closing of the deal includes an expected $1 billion in Afterpay operating expenses, with $53 million in quarterly expenses related to the deal over the next few years. These costs will weigh on profits by about $200 million per year. Despite these issues, the stock appears drastically oversold at current levels. The management has outlined a new long-term investment framework, which they believe will improve the company’s earnings quality. On Thursday investors will want more details on these initiatives to assess how much time the management deserves.
Apple (AAPL) - Reports after the close, Thursday, May 4
Wall Street expects Apple to earn $1.43 per share on revenue of $92.98 billion. This compares to the year-ago quarter when earnings came to $1.52 per share on revenue of $97.28 billion.
What to watch: Apple stock has gone on an impressive run, rising some 30% year to date, almost quadrupling the 7.7% rise in the S&P 500 index. The shares have returned about 7% just in the past thirty days, pushing the tech giant past a $2.5 trillion valuation. It appears the tech giant has its mojo back after licking its wounds in 2022. Even with these strong returns, it’s hard to ignore the many catalysts that can keep the shares rising. Last week, in partnership with Goldman Sachs (GS), Apple announced its entry into the banking system by offering a high-interest (4.15%) savings account for Apple Card holders. Also, as part of its growing streaming investments, during the quarter Apple began a 10-year partnership with Major League Soccer, launching MLS Season Pass, which gives soccer fans access to every live MLS regular season game as well as the playoffs and MLS Cup. Let’s not forget Apple’s new line of hardware products such as the new MacBook Pro, which are powered by the company’s new M2 Pro and M2 Max chips. These models offer not only robust performance, but they also use less energy which elongates the battery life. To be sure, inflation continues to drive higher operating expenses for Apple, which remains a headwind for its profit margins. While iPhone sales generate a sizable portion of revenues, Apple’s collective high-margin Services businesses continue to grow. It remains to be seen if the Services segment, which generated 70%+ margins in 2022, can power the company through any near-term inflationary headwinds.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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