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Therese Poletti’s Tech Tales: After a $2 trillion stock rebound, Big Tech wades into sea of uncertainty

The trajectory for tech remains worrisome, but Wall Street is still betting on a second-half rebound despite little concrete evidence that it will happen. Read More...

Big Tech didn’t offer strong holiday returns, but Wall Street still responded to fourth-quarter results by throwing $2 trillion in valuation at the biggest tech companies.

That stock bounce appears to be predicated on a widespread belief that there will be a rebound in the second half of this year, when companies lap the results that disappointed Wall Street in the back end of 2022. While executives have provided color about expecting such a rebound, most have not offered any concrete evidence — such as annual forecasts — for it, and the direction of some of tech’s core businesses would suggest it is far from certain.

Growth in cloud computing has hit the biggest stall in its short history, putting Microsoft Corp.’s MSFT, -1.40% and Amazon.com Inc.’s AMZN, -0.70% trajectory into sharp question, as analysts contend that the cloud slowdown appears to be getting worse. Internet advertising has been hitting growth concerns for a year now, and that also does not appear to be turning around, creating huge question marks for Google parent Alphabet Inc. GOOGL, +0.53% GOOG, +0.82% and Facebook parent Meta Platforms Inc. META, -0.05%, as well as smaller players such as Snap Inc. SNAP, +2.10% and Pinterest Inc. PINS, +0.88%.

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All of those companies will report first-quarter results this week, and it could cause quite an upheaval. Maribel Lopez, principal analyst at Lopez Research, said she isn’t concerned about the results tech companies will report, but the forecasts going forward are a very different story.

“[The first quarter] should be fine,” Lopez told MarketWatch. “When we hit the end of [the second quarter], that’s when we will see if the wheels are falling off the bus.” She added that she is “really worried about the summer.”

Evercore ISI analysts also warned about the possibility of a worsening economy. After hosting a webinar on the current internet advertising environment, during which one panelist discussed the possibility of a worse second half, the analysts warned that “while expectations likely baked in [for] a soft landing for the second half, current Street estimates do not reflect a hard-landing scenario, which we believe could introduce greater downside risk to estimates in the second half.”

While Wall Street worries about the second half, tech executives are expected to look much farther into the future in an attempt to divert attention away from the sudden growth issues and toward the future role of artificial intelligence. As MarketWatch reported, AI will be the watchword for Facebook’s Mark Zuckerberg and Google’s Sundar Pichai, and it will also be a big part of Microsoft’s report, after that company created a lot of buzz in the first quarter with its partnership with OpenAI.

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Returns from AI efforts are likely to come years in the future, however, and tech companies looking to build for that future face much higher costs in the near term than will be offset by any revenue derived from early offerings. That’s why smart investors will look past the AI hype and dive into the numbers.

“Tech, I think, is going to be really interesting,” Brendan Connaughton, the founder and managing partner of Catalyst Private Wealth, said in an email. “Layoffs are continuing and I’m going to be listing to managements’ comments on that, capital expenditures and how margins are doing.”

The numbers that will matter

As it stands now, Wall Street is betting that companies in the broader S&P 500 SPX, +0.09% will fare better this quarter than the information technology sector will. According to FactSet, the analyst consensus for the first quarter among S&P 500 companies is for sales growth of 2.26%. The outlook for the overall IT sector, which outpaced the S&P 500 in 2021, is for revenue to decline 4.5%, excluding internet, social-media companies and e-commerce.

So far, though, the S&P 500 companies are outpacing those sales estimates, with 17% of companies reporting in. The same pattern is being seen in tech, albeit on a less pronounced level. The overall S&P 500 has so far seen revenue growth of 7.36%, while the decline of revenue in IT is slightly less than expected, with a 3.47% drop so far this quarter, with only 12% reporting.

A flurry of companies that were trying to finish up IT projects before more severe belt tightening kicks in will help first-quarter results, Lopez said. Indeed, software companies are poised for the best growth rates in IT in the quarter, with the software segment forecast to see revenue growth of 7.4%. Software is also expected to be the most profitable amid a troubled IT sector, with FactSet estimates indicating earnings growth of 5.56%.

There are still issues within software, however. In the case of Microsoft, for example, Evercore ISI analysts said they expect solid results, with much of the focus on the company’s Azure public cloud business. For Microsoft’s fiscal fourth quarter, they predicted in a recent note to clients that Azure revenue will grow around 26%, in line with the rest of Wall Street’s expectations. That pales in comparison with heady growth rates north of 40% in previous years, but double-digit growth in anything right now will appease investors.

Microsoft’s forecast will be the true test, though. The Evercore ISI analysts predicted Azure would bottom at 20% revenue growth in the calendar third quarter of this year, and others are wondering if Microsoft executives will guide for more deceleration than expected in the calendar second quarter.

“Our checks point to continued elevated headwinds for Azure & Windows, and while we think this was appropriately modeled for [the March quarter], it could drive some modest risk to [June quarter] estimates,” TD Cowen analysts wrote.

Sinking social and semiconductors

Internet companies such as Google and Meta, once the darlings of investors, have been struggling with one of the worst advertising environments in years. These two companies, plus Match Group Inc. MTCH, -1.26%, are forecast to see anemic sales growth of 3.2%, but even worse, profits are forecast to fall 19.2%.

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For Meta, even paltry revenue growth in the first quarter is an improvement after it saw revenue fall for the first time in 2022, but the company is still cutting jobs. More layoffs are expected to be announced, and Meta has put CEO and co-founder Mark Zuckerberg’s grand and expensive Metaverse vision on the back burner. In addition to hearing about artificial intelligence on the company’s platforms, investors are also hoping for some details from the first quarter of Meta Verified subscription revenue.

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Wall Street has predicted that the worst results will come from the semiconductor business, where overall revenues are expected to tumble 17% and profits are expected to plummet almost 43%.

But with memory-chip maker Micron Technology Inc.’s MU, -2.65% dismal results late last month, actual reported revenue of two chip makers so far has fallen a whopping 36%. Results from Intel Corp. INTC, -2.11% are also a drag on the sector, as the second-largest chip maker continues to grapple with product delays and to make contract manufacturing a much bigger part of its business. Analysts expect Intel’s revenue to fall a stunning 40% in the first quarter when it reports Thursday afternoon.

Hardware is also expected to disappoint, fueled by the big drop in PC sales after a huge pandemic boom. Apple Inc. AAPL, +0.19%, which reports a bit late this quarter, on May 4, saw a 29% drop in Mac sales, according to IDC and Gartner. Analysts are forecasting Apple’s overall revenue drop at 5%, pumped up by the iPhone and services.

Compared with some of the barn-burner quarters tech saw during the pandemic, first-quarter results will be a big comedown, but Wall Street is prepared for that. It is not, however, prepared for weakness to persist or even grow in the second half of the year, and if analysts and investors get a whiff of that possibility in the weeks or months to come, those improved valuations could come crashing back down.

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