Nasdaq 100 Forecast: Eyes turn to Big Tech earnings season

Big Tech earnings calendar

Big Tech earnings season is just around the corner, when we will see some of the largest publicly-listed companies report their latest quarterly results. Below is a table outlining the key dates to watch:

Big Tech stock	Quarter	Earnings date
Alphabet	Q1	Tuesday April 25th
Microsoft	Q3	Tuesday April 25th
Meta	Q1	Wednesday April 26th
Amazon	Q1	Thursday April 27th
Apple	Q2	Thursday May 4th

 

Big Tech earnings consensus

Wall Street anticipates it will be another tough quarter for Big Tech earnings. Microsoft is the only member forecast to report EPS growth after suffering falls in the last two quarters, while the rest of the group are anticipated to report another quarter of declines.

Below is a table outlining diluted EPS expectations for the upcoming quarterly results, according to Bloomberg consensus numbers:

Big Tech stock	Diluted EPS forecast	YoY change
Alphabet	$1.11	-9.9%
Microsoft	$2.23	+0.7%
Meta	$1.99	-26.8%
Amazon	$0.20	-3.4%
Apple	$1.42	-6.3%

 

Alphabet Q1 earnings preview

Advertising conditions remain challenging and Wall Street is anticipating another quarter of mild declines in revenue from its Google search engine and YouTube, with overall ad sales to be down 1.6%. This is forecast to be countered by 28% growth in Google Cloud sales, although this has slowed in recent quarters and it is important to remember that the division is still in the red even if it is propping-up overall revenue.

Higher costs, as well as higher capital expenditure, are pressuring margins and this means every unit will be far less profitable. Alphabet’s operating margin is estimated to come in at 23.9% compared to 29.6% last year. Slower revenue growth twinned with tighter margins is set to see Alphabet’s EPS crunched for a fourth consecutive quarter.

Notably, Alphabet’s headcount should have peaked and is expected to start coming down this quarter as it starts to implement the 12,000 job cuts announced in January. Importantly, markets believe Alphabet’s revenue will begin to accelerate again that its margin will start to recover in the second quarter, which investors hope will allow EPS to rise for the first time in over a year. Signs that Google Cloud is approaching breakeven would be supportive.

Still, the outlook could be fragile. While Alphabet can control costs, the future path of revenue remains highly sensitive to the challenging economic outlook and increased competition, sparked by the eruption of artificial intelligence. That could weigh on pricing and prompt Alphabet to ramp-up spending even further to improve its offering and retain customers.

 

Microsoft Q3 earnings preview

Microsoft saw earnings fall for the first time in seven years in the last quarter but Wall Street believes this will be a blip and that it will be the only member of Big Tech to grow its bottom-line this quarter, albeit by a tepid 0.7%.

Revenue is forecast to rise 3.6% as Microsoft’s business, offering vital everyday software and services, is proving more resilient in the current economic climate, although sales of computers and other hardware will continue to struggle. Still, markets forecast its Intelligent Cloud division will report a sixth consecutive quarter of slower growth, with sales expected to rise less than 15% as businesses pullback on spending. Azure is expected to keep growth above 30% but this too has seen the foot slammed on the brakes. Productivity & Business Processes, driven by its Office and other software, may prove a bright spot considering analysts are expecting revenue and operating profits to accelerate for the first time in over a year-and-a-half.

Costs continue to rise at a faster pace than revenue, which should lead to tighter margins and lower cashflow. Microsoft has started to get a grip on costs after announcing 10,000 layoffs in January and a commitment to refocus on ‘secular growth and long-term competitiveness’ and markets hope this, alongside an acceleration in revenue growth in the fourth quarter, will stabilise the pressure on profitability.

Expect lots of attention on AI in the conference call as investors gauge the impact of the initial success of OpenAI’s ChatGPT and Microsoft’s efforts to start integrating AI into its array of services. Microsoft has declared war on Google and said it can afford to compete at a much lower margin to poach business from the market-leader. Notably, recent reports suggest Samsung – the largest mobile phone maker in the world – has considered switching its default search engine to Microsoft’s Bing, suggesting the company is making significant headway in disrupting Alphabet’s business.

 

Meta Q1 earnings preview

Meta’s bottom-line has dwindled for five consecutive quarters and Wall Street anticipates a sixth straight fall in the first quarter as revenue remains under pressure from soft advertising conditions and earnings continue to take a hit from rising costs.

Daily Active Users hit the 2 billion threshold for the first time ever in the last quarter and are forecast to have continued rising in the latest quarter, but engagement continues to weaken and hurt ad prices at a time when businesses are already being more stringent with spending. This is set to see revenue fall 1% from last year.

Costs are forecast to be up 9.6% from last year. Increases are easing as Meta’s focus on cost control starts to make an impact. Meta has announced 21,000 job cuts since last November and its headcount is expected to be down around 8,000 from the fourth quarter (to around 78,300 at the end of March).

Its commitment to keep investing in the metaverse will also contribute to lower profits, with its Reality Labs unit forecast to report a whopping $3.8 billion loss in the first quarter with no signs that this will ease anytime soon. In fact, Wall Street thinks it will lose just under $19 billion on its metaverse ambitions in 2023! Cutting back here would be the easiest way to alleviate pressure without impacting its core social media business, but at the risk of losing its lead in what is still a very nascent (and unproven) market.

For now, analysts believe the second half of 2023 will be much better than the first on the belief that advertising demand will rebound, costs will start to decline and margins will improve. This will place the focus on the outlook.

 

Amazon Q1 earnings preview

Amazon’s revenue continues to rise despite the slump in demand for ecommerce as its cloud-computing arm, subscription services and its small but fast-growing advertising business continue to grow, but costs continue to increase at a faster rate and contract margins. That is forecast to see Amazon’s EPS fall for a seventh consecutive quarter in the first three months of 2023.

Amazon Web Services, which makes the bulk of profits, is forecast to report revenue growth of just 14% in the first quarter – less than half the rate of growth we saw the year before as businesses become more selective with their cloud computing spend. That slowdown is set to continue going forward and that is contributing to lower margins and profits, but Amazon is willing to sacrifice profits to retain leadership and help clients through tougher times.

The slowdown from its money making division may heighten pressure for Amazon to get a better grip on costs across the wider business. Expenses have been outpacing revenue for some time but Wall Street estimates the topline will start to grow at a faster pace than costs from the second quarter onwards, which should lead to a rebound in margins once they bottom out in the three months to the end of June, according to consensus figures.

In ecommerce, third-party sales continue to slow but are set to keep growing while online sales decline, but analysts hope the latter will start to grow again in the second quarter and accelerate in the second half as it comes up against easier comparatives.

Amazon has seen subscription growth ease since booming during the pandemic but it has remained steady over the past year (forecast to rise 10.9% in the first quarter) to suggest consumers place a high value on its Prime service. Advertising is currently one of the fastest-growing parts of the business and expected to see revenue rise 15.8% in the quarter, but this has eased because it is not immune to the broader slowdown.

 

Apple Q2 earnings preview

Apple had emerged as the standout performer as Big Tech started to see a slowdown but succumbed to the tougher environment in the last quarter, when revenue fell for the first time in three years as iPhone sales, which make up over half of all revenue, slumped while earnings declined as higher costs and spending hit margins.

This trend is expected to have continued in the first quarter of 2023, with overall revenue forecast to be down 4.9%. Product revenue is set to fall 7.4% from the year before as sales of iPhones, iPads, Macs and Wearables all decline. Sales of iPhones (forecast to fall 3.6%) have been lacklustre, but investors hope stronger demand for premium versions over cheaper models will provide some protection to margins. Mac sales could fall much sharper than consensus figures estimate, based on industry data, suggesting the consensus is geared to the downside.

Weak hardware demand will be countered by a 6.5% rise in revenue from its higher-margin Services division.

Revenue is expected to fall in every single region this quarter, showing Apple is feeling the pressure across the board. China remains a central focus. Although the economy rebounded in the first quarter thanks to a rise in consumer spending after the abandonment of Covid-19 restrictions, Wall Street is still expecting revenue from the region to be down 6.8% in the period but sees this returning to growth in the three months to the end of June and accelerate in the second half of 2023. There will also be a lot of interest around India, where Apple has just opened its first stores in the country to spark hopes that sales to the growing middle-class can provide a major new catalyst over the coming years.

Costs and spending continues to rise at double-digit rates and hurt profitability, which is set to result in a second consecutive quarter of lower EPS. Apple was more disciplined when it came to hiring during the pandemic compared to its over-zealous peers but may need to take more drastic action going forward, with signs it is already slowing down the pace of new hires. Currently, Wall Street anticipates revenue and earnings will both return to growth in the third quarter of its financial year and then accelerate in the following periods.

 

Big Tech earnings: Watch the Nasdaq 100

The index to watch this Big Tech earnings season is the Nasdaq 100 considering Alphabet, Microsoft, Meta, Amazon and Apple collectively make up almost 43% of the index. This means the results will have a significant impact on the tech-heavy index.

We can see a potential bullish flag pattern emerging considering the index has traded in a fairly tight range in April after rallying from the lows we saw in mid-March. Plus, all three moving averages are trending higher and the 100-day sma has recently crossed back above the longer-term 200 day sma, providing supportive signs. The immediate job is break above 13,200 and achieve a new seven month high considering it has tried and failed to sustain a move above here on three occasions since the start of this month alone.

However, we can also see a bearish divergence on the RSI, which has fallen while the index has risen since the start of February to point toward a potential pullback. There is evidence to suggest there is some support around the 12,900 mark, in-line with the peak we saw at the start of February and the floor that has been tested on a couple of occasions this month. A fall below here will bring the 50-day sma back into play but a slip toward 12,000, representing the ceiling we saw late last year and aligned with the longer-term moving averages, is possible if this earnings seasons sparks a heavy selloff.

 

Big Tech stocks: Where’s the value?

Big Tech stocks have all booked in strong gains since the start of 2023 (to the end of play on April 18), driving the Nasdaq 100 over 20% higher. Still, we can see that there is a notable divergence in terms of valuations.

Meta is still trading at a discount to the wider market in terms of blended-forward price-to-earnings ratio (BF PE ratio) despite the stellar recovery in its share price, and Alphabet has also underperformed and now boasts a lower valuation as concerns over advertising demand and fears over what artificial intelligence means for its future. Amazon remains a standout as it continues to prioritise growth over profitability.

At the other end, we can see that more resilient performances from Microsoft and Apple have prompted markets to give them premium valuations, with both stocks priced at a significantly higher level than the Nasdaq 100.

Big Tech stock	YTD share price change	BF PE ratio
Nasdaq 100	20.5%	20.7x
Microsoft	20.4%	27.5x
Apple	33.1%	26.3x
Alphabet	17.3%	17.8x
Meta	74.7%	17.0x
Amazon	19.2%	37.5x

(Source: Bloomberg)

 

 

Take advantage of extended hours trading

Big Tech stocks will release earnings after markets close and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade Microsoft, Alphabet, Meta, Amazon and Apple using our extended hours offering.

While trading before and after hours creates opportunities for traders, it also creates risk, particularly due to the lower liquidity levels. Find out more about Extended Hours Trading.

 

How to trade Big Tech stocks

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