An important week in the first-quarter earnings season just concluded, where tech giants such as Microsoft (MSFT), Meta Platforms (META), and Google parent Alphabet (GOOG, GOOGL), among others, reported their results, which affirmed not only that the AI narrative is still in play, but also several mega-cap Big-Tech names had gotten too cheap.
It isn’t just Big-Tech that’s shining, however. Out of the almost 50% of the S&P 500 companies have reported earnings thus far, close to 80% of the reports have beaten Wall Street estimates. Despite what still remains elevated inflation data, investors responded favorably on Friday, helping both the S&P 500 and Nasdaq Composite to log their best week in five months. The S&P 500 index gained 51.54 points, or 1.02%, finishing at 5,099.96, while the tech-heavy Nasdaq added 316.14 points, or 2.03%, to close at 15,927.90, securing its best single-day rally since February.
The Dow Jones Industrial Average rose 153.86 points, or 0.4%, to finish at 38,239.66. For the week, the S&P 500 gained 2.7%, snapping a three-week losing streak, while the Nasdaq gained 4.2%, logging its first positive week since the last week in March. The Dow was the laggard for the week, gaining just 0.7%. After a brutal past couple of weeks, investors responded with strategic buying of equities, which helped all three major averages to recover to key technical and psychological levels.
For the S&P 500, it recovered the 5,000 milestone which it lost last week, while the Dow recovered the 38,000 level. As noted, mega-cap Big-Tech names like Microsoft and Google-parent Alphabet powered the rally. Both tech powerhouses produced strong earnings results on Thursday, asserting their artificial intelligence capabilities. Alphabet, which announced its first-ever quarterly dividend, and a $70 billion stock buyback, surged more that 10% on a strong earnings beat.
Meanwhile, after posting strong fiscal third-quarter results on there back of accelerated cloud revenue growth, Microsoft stock rose nearly 2%. While it’s still too early to send the “all clear” signal on the market correction, it’s nonetheless encouraging to see investors investors are now more optimistic about the direction of the economy, less fixated on the day-to-day economic data and the near-term impact of monetary policy decisions. And as to whether this rally continues next week remains to be seen. But here are the stocks I’ll be watching.
Amazon (AMZN) – Reports after the close, Tuesday, Apr. 29
Wall Street expects Amazon to earn 83 cents per share on revenue of $142.47 billion. This compares to the year-ago when earnings were 31 cents per share on revenue of $113.91 billion.
What to watch: With a gain 22% in six months and 18% year to date, Amazon has been one of the best-performing stocks in retail and among its Magnificent Seven peers. The shares have risen 74% over the past year, besting the 25% rise in the S&P 500 index. The e-commerce giant’s growth and efficiency strategies have paid off handsomely. Spanning the last four quarters, Amazon has not only delivered an increase of 565 basis points in its EBITDA margin, the company’s net profit margin has increased by 672 basis points.
All told, in 2023, the commerce giant achieved all-time high operating margins, thanks to second-half operational improvements. In the most recent quarter, Amazon showed signs that its cost-cutting initiatives are working as profits have significantly improved across various segments. Despite Q4 being a seasonally lower-margin quarter, Amazon maintained record levels of profitability in both FCF and EBIT.
Just as impressive, its management guided for Q1 operating margins of 8.4% at the high point. In terms of overall execution, the management continues to push all of the right buttons. Meanwhile, the company’s efforts to diversify revenue streams is taking root with Q4 third-party merchant revenue growing 20%. Non-goods services, including subscription services, AWS, and advertising, generated Q4 revenue of $47.5 billion, growing 15.7% year over year. And with Q4 revenue of $23.1 billion, AWS maintained its high operating margin near 30%.
Amazon now has slimmer cost profile which will lend to faster earnings growth in the quarters ahead. From a valuation perspective, while Amazon stock is not as cheap as it were six months ago, the shares still looks like a bargain relative to the company’s long-term potential. On Tuesday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return investment thesis.
Block (SQ) – Reports after the close, Thursday, May 2
Wall Street expects Block to earn 72 cents per share on revenue of $5.83 billion. This compares to the year-ago quarter when earnings came to 40 cents per share on revenue of $4.61 billion.
What to watch: Shares of Block have surged some 80% over the past six months, crushing the 22% rise in the S&P 500 index. With the stock is down 4% year to date, and 10% in thirty days, there’s still an opportunity here for investors who are willing to wait the next 12 to 18 months. The fintech app company was recently upgraded by Seaport Research, citing that the firm referred to as “ample opportunity for further operating leverage.”
Seaport upgraded the stock to Buy from Neutral, with a price target of $95. From current level os $74 per share, that assumes potential premiums of 22%. Meanwhile, Seaport raised its forecasts for adjusted EBITDA for fiscal 2024 and 2025, and expects Block be well on its way to executing against its Rule of 40 framework by 2026.
Separately, the company also received an upgraded from analysts at Wells Fargo which cited SQ’s gross profit margins. Wells Fargo boosted their rating to Overweight from Equal Weight, with the price target raised to $95 from $65.
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 Block 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. On Thursday investors will want more details on these initiatives to assess where the stock valuation should be.
Apple (AAPL) – Reports after the close, Thursday, May 2
Wall Street expects Apple to earn $1.50 per share on revenue of $90.04 billion. This compares to the year-ago quarter when earnings came to $1.52 per share on revenue of $94.84 billion.
What to watch: Since the start of the year, Apple shares have not performed as well as investors would have liked. Down 11%, compared to the 7% rise in the S&P 500 index, Apple stock has been seen as a disappointment. And when dating back the past six months, during which it has traded flat, against a 22% S&P 500 gains, Apple investors have been frustrated.
But as we look into the rest of the year, there are plenty of reason to be bullish about Apple’s growth prospects, including the company’s efforts towards artificial intelligence. The company’s upcoming iOS 18 update will include AI features that will be processed entirely on the device itself as opposed to the cloud. Some analysts have speculated that the soon-to-be launched iPhone 16 will offer AI security and privacy features referred to as game-changing.
According to Bloomberg Apple analyst Mark Gurman, the company is working on its own large language model to boosts generative AI features on the iPhone 16. “Apple’s AI tools may be a bit less powerful and knowledgeable in some cases (the company could fill in the gaps by teaming up with Google and other AI providers), but the approach will make response times far quicker. And it will be easier for Apple to maintain privacy,” Gurman wrote.
These features will come at an important time for Apple as the company has suffered from a global decline in phone shipments. But it’s not just about the iPhones. Apple’s Services segment will be closely-watched on Thursday. Services should continue to generate high double-digit revenue growth this quarter and well into 2024, which will help offset the macro weakness impacting iPhone sales. So, combined with the the company’s momentum in services, efforts towards operational efficiency gains, and strategic capital allocation, there are tons of reason to love Apple stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
