Tech earnings roundup – did the ‘Magnificent Seven’ live up to the hype?

Big tech has had an astonishing time of it recently. Excitement around artificial intelligence (AI) has grown and that’s increased the pressure when these companies report results.

The market was hit by a wave of tech earnings last week, and it looks like these huge names are still carrying the market on their backs. But what did we learn from the big names this earnings season about where could they go from here, and what should investors look out for?

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

This article isn’t personal advice. Investments and any income from them can fall and rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. And remember, past performance isn’t a guide to future returns.

Tech’s best performers

Meta has seen an exceptional jump in its valuation, announcing its first-ever quarterly dividend and a hefty share buyback. Topping its estimates also came as a welcome surprise – the advertising revenue landscape is still very bumpy, and Meta has been navigating this well so far.

The promise of its offering is clear, with advertising impressions rising by 20%, and price rises being tapered to more customer-friendly levels.

Announcing their first dividend is a bold and well-regarded move. The amount of free cash pumping through the business means it can more than afford it. And it helps pay investors for their patience while Meta works out the next generation of growth and all the Metaverse could entail, although there are of course no guarantees and there will likely be ups and downs along the way.

It was also a good set of results for Amazon, who took a gamble hiring crowds of extra seasonal workers over the holidays. Retail margins have been squashed in the past when demand failed to show up after over-zealous capacity ramp ups. But the world’s biggest retailer comfortably beat analyst expectations with quarterly revenue of $170bn.

This record period shows there’s still plenty of consumer strength rattling through economies, and Amazon will be hoping to capitalise on that through new AI shopping assistant tools.

One area to keep focus on is Amazon Web Services (AWS). AWS is a phenomenal product, and we think its value isn’t properly captured by Amazon’s market capitalisation. Growth rate has come off the boil slightly as businesses trim spending, but this could reverse in the long run – leaving Amazon in a potentially enviable position.

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Some questions to be answered

A harsh critic would say Apple was the bad apple in the barrel last quarter, with disappointing reading from sales in China. While the group beat analyst forecasts, revenue growth of 2% isn’t quite juicy enough.

Credit where it’s due though, the 2% revenue growth breaks a streak of four straight quarters of annual declines. And the all-important services revenue reached an all-time high.

Looking ahead, the newly launched Apple Vision Pro headset has a lot resting on it. It will need strong sales to convince investors that Apple can meaningfully engage with the AI revolution.

Microsoft had a lot to live up to last quarter, and even the most bullish tech investors are wondering how much room there is to run for these stock market darlings. The software giant has delivered a healthy set of results, but not in a strong enough dose to appease the market.

Cloud growth is still impressive by most standards, and this has been the centre of bubbling excitement around the stock. For now, it looks like concerns about ‘growth’ stocks mean good isn’t good enough, as the Federal Reserve’s (Fed) latest interest rate decision edges closer.

Progress is impressive, but there are still question marks hanging around.

Businesses have been showing signs of caution and it’s unclear if purse strings are going to loosen much further this year. Spending on both cloud and advertising are due to go up this year but, depending on where the economy lands, its pace could leave room for disappointment.

Microsoft’s core software-as-a-service offering is still its crowning jewel. Operating margins over 40% are hard to find and offer a buffer for the group to explore bold new frontiers in AI.

Microsoft is doing a lot of things right and has an enviable product suite. The question now is whether market expectations and reality are matching – there’s growing concern that one is racing ahead of the other, and that tends to lead to trips and falls in the short term.

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Does the US market have room to run?

• There could be disappointment on the way as there’s still a disconnect between when the Fed will start cutting interest rates, and when the market thinks it will.
• Consumer resilience is much higher than expected – just look to Amazon Retail – and that’s an issue for inflation, just like the hotter-than-expected jobs market. But these elements could increase the chances that a softer economic landing could be possible while bringing rising prices back in line with targets.
• Looking further ahead, we still think regulatory risk around cloud and AI is a longer-term threat. Lack of deep knowledge on these areas increases the likelihood of unhelpful rulings in the future, which could lead to ups and downs.

What could investors do?

Sky-high valuations and game-changing technologies make investing in individual companies riskier. That’s not to say we aren’t excited by the potential, but it’s a really important time to remember not to put all your eggs in one basket.

Keeping an eye on businesses with strong fundamentals like free cash flow and manageable debt levels is also important. These companies are more likely to stomach ups and downs and invest in the next big thing.

How to build a diverse portfolio

Remember, before trading any US shares, you need to complete a W-8BEN form.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views might have changed since then. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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