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Earnings Unfold: A Tale of Artificial Intelligence and Energy Reality

Stavros Tousios | Wednesday 24 April 2024

Major US stock indices closed higher on Tuesday, April 23, driven by upbeat earnings from communication services and technology sectors. The Dow Jones (USA 30) rose 0.69%, the Nasdaq (US-TECH 100) added 1.59%, and the S&P 500 (S&P 500) gained 1.20%.

Since Tesla (TSLA) reported earnings on Tuesday, April 23, Meta (META), Microsoft (MSFT), and Alphabet (GOOG) may be the focus in tech for the rest of the week. Notably, the earnings season has shown a strong digital ad environment and stable cloud infrastructure spending so far.

While earnings for S&P 500 constituents are expected to grow just 0.5% in Q1, the upside is attributed to just five companies, including the four above and Nvidia (NVDA). The rest of the 495 companies are actually expected to decline 6% in Q1.

With tech stocks lagging this year despite high earnings growth forecasts, the energy sector may be worth paying attention to the releases. WTI oil (CL) prices have also increased this year, with oil majors Chevron (CVX) and ExxonMobil (XOM) known to follow the lead. The two companies are set to report on Friday, April 26.

An illustration of earnings data

AI Takes Centre Stage for Big-Tech Earnings 

For the major AI-led tech companies reporting this week, some analysts argue that AI is not expected to have a "huge" impact on earnings growth and point to their core businesses. There are also concerns that expectations for AI growth may be exaggerated and that innovation costs could impact earnings. However, several other analysts remain positive on tech majors Meta, Microsoft, and Alphabet ahead of their earnings reports this week, citing signs of increased AI and cloud spending in a contrarian view. Let's cover them one by one.  (Source: Yahoo Finance)

Meta Focus Lies in Ad Growth, But Regulatory Headwinds Remain

Meta will report its Q1 earnings on Wednesday, April 24, after market close. The company is expected to report a 25% revenue growth to $36.1 billion and earnings per share (EPS) of $4.32. However, revenue growth may slow going forward, which could disappoint investors. Concerns also remain about the impact of regulations in Europe and China, primarily how changes may impact advertising revenue from China. 

BofA (BAC) analysts remain positive on Meta and expect revenue to come in at the higher end of guidance to $37 billion due to growing investments in AI capabilities. Meta will likely provide updates on how AI powers its recommendation and ranking engines, which investors may wish to follow. It will also discuss its new AI assistant, Llama 3 and AI chip, the Next Gen Meta Training and Inference Accelerator (MTIA).

AI Integration and Cloud Services Shine for Microsoft

Microsoft is scheduled to report its fiscal Q3 earnings after market close on Thursday, April 25. Analysts expect earnings to rise 15.1% year-over-year (YoY) to $2.82 per share, with revenue up 14.9% to $60.8 billion. UBS (UBSG.VX) analysts, in particular, have noted that cloud infrastructure spending seems stable and AI spending is increasing, which aligns well with Microsoft's prospects. 

After all, Microsoft has an early AI adapter advantage through its OpenAI partnership. AI is expected to boost its cloud sales and enterprise offerings through integrations like Copilot. If AI delivers on its promises, it could add $7 to $10 trillion to the global economy, according to Microsoft CEO Satya Nadella.

Alphabet Betting Big on AI and Cloud Services

Google's parent company, Alphabet, will also report its Q1 earnings on Thursday, April 25, after market close. Alphabet's earnings are forecast to rise 27% to $1.49 per share. In comparison, revenue is projected to grow 14% to $66.02 billion, likely reflecting strength in its cloud business, which has driven the company's growth. Cloud revenues are expected to grow 24.1% in the first quarter. 

For those interested in Alphabet, the earnings call may provide more details on the company's restructuring measures to shift towards an AI-focused terrain. Alphabet may also offer insights into AI monetisation across its businesses and discuss Gemini and its new AI chip, the Google Axion Processor, along with the integration of Nvidia's Blackwell platform into its cloud.

Oil Majors in Focus Amid Higher WTI Prices

Despite a slight YoY rise in oil prices in Q1 2024, the energy sector earnings are projected to decline by 25.6% for Q1 2024. While energy stocks have performed well so far this year, aided by higher oil prices, majors face tough comparisons following Russia's invasion of Ukraine. Still, trader sentiment remains positive heading into earnings amidst still-high oil prices and a quarterly record of mergers and acquisitions. 2023 also saw record activity, with Exxon's $60 billion purchase of Pioneer (PXD) and Chevron's proposed $53 billion acquisition of Hess (HES).

Chevron Dividend Hike Signals Strong Cash Flow Confidence

Chevron is expected to report a 20% decline in EPS due to lower oil prices. For the full fiscal year, analysts expect EPS of $14 and revenue of $292.50 billion. Despite the poor projections, Chevron recently increased its quarterly dividend by 8% to 4.14%, indicating confidence in its cash flow generation ability. In addition, Warren Buffett increased Berkshire Hathaway's holdings, with some seeing this as an approval of Chevron's recent merger deal.

Eyes on Exxon's Production Levels and Projects Outlook

ExxonMobil is also forecast to report an over 20% drop in EPS due to lower oil and natural gas (NG) prices and losses on fuel derivatives. Analysts expect lower YoY earnings of $2.19 per share but higher revenues of $86.6 billion. While the company is expected to report lower revenue and earnings, investors may monitor oil and gas production levels, capital and exploration expenditures, strategic flexibility, and projects coming online. Exxon serves as a proxy for the broader oil industry and, after all, an important player for traders to follow. Markedly, consensus earnings estimates have been revised upwards by 10.09% in the last 30 days. 

Piper Sandler analysts have raised the price targets for both stocks. Still, ExxonMobil's stock has performed better, implying the market believes it will win an arbitration case against Chevron over assets in Guyana.

Conclusion

This earnings season has painted a picture of resilience in the tech sector, led by AI and cloud services, while the energy sector braces for the results of geopolitical influences and price dynamics. Investors may prefer to stay informed and agile, as these diverse earnings outcomes could signal pivotal shifts in trading strategies.


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