Big tech earnings to offer reality check to investors over AI hype

By Natalie Lung and Crystal Chui

Big Tech earnings next week will offer investors a dose of reality following this year’s impressive gains in the sector that were powered by hype over artificial intelligence. 
 

Analysts are expecting tech profits to register the biggest drop since 2009, with businesses curbing spending on software, cloud and advertising services as they’re pinched by inflation and higher borrowing costs. Earnings misses on already revised-down estimates could threaten stock prices even as any guidance updates are scrutinized by the market.

Also in focus will be how cost-reduction measures, including headline-grabbing mass layoffs by the likes of Alphabet, Meta and Amazon, have helped ease margin pressures.

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Monday: Expect First Republic Bank’s (FRC US) report, due after the closing bell, to be “unflattering” as it reveals the extent of debilitating deposit outflows in the first quarter, Bloomberg Intelligence says. Having received a lifeline from major peers to help stabilize its funding base, the San Francisco-based bank’s total deposits for the quarter are projected to be down about $40 billion from the previous three months. On earnings day, First Republic will also get a chance to detail how it plans to move past the regional banking crisis. Among issues that could be addressed are balance-sheet resizing, the implications of higher funding costs and a reduction in the expense base, BI adds. Net interest margin could sag to its lowest level in at least 11 years amid the surge in funding costs. 

Tuesday: Alphabet (GOOGL US) is due post-market. Top-line growth is likely to remain muted with a pullback in ad spending, particularly by the financial sector, adding to headwinds. Though its core search-ads business remains pressured by macroeconomic uncertainty, Alphabet’s Cloud segment could reach breakeven margin after its targeted layoffs, BI says.

Microsoft (MSFT US) will also report after the close. AI enhancements to its search engine Bing are unlikely to translate to sizable sales growth for the company in the near term, BI says. Still, the addition of OpenAI’s technology to provide ChatGPT-like responses to user queries is positioning Bing as a possible threat to Google’s search dominance and could result in increased interest from advertisers and vendors. A decline in PC sales and a slowdown in cloud services continue to weigh on the top-line, with consensus expecting the smallest constant-currency revenue growth since 2017.
 

Wednesday: Meta Platforms (META US) reports after the close. Aided by cost cuts, including multiple rounds of layoffs, the Facebook parent’s operating margin is set to expand sequentially by 18%, returning to growth after four quarters of declines. Despite increasing contributions from Instagram Reels, WhatsApp and messaging ads, weak engagement on the Facebook app remains a drag on Meta’s ad-impressions growth. The loss-incurring Reality Labs division will be a key focus on the earnings call as it’s so far been mostly insulated from the cost-reduction push, BI says. 

Boeing (BA US) is due premarket. Investors will watch for outlook updates after the aircraft maker’s move this month to pause deliveries of some 737 Max jets over a manufacturing flaw. Boeing Chief Executive Officer Dave Calhoun has confirmed the company still plans to boost production of the model while it works through the glitch.
 

Thursday: Caterpillar (CAT US) is expected to post declines in first-quarter sales and profit from the prior period when it reports before the opening bell. The heavy machinery maker, often considered a global economic bellwether, could see demand momentum slow and provide a glimpse of the impact of tightening credit conditions on construction activity. Nonetheless, healthy pricing, higher year-on-year volume and improved manufacturing efficiencies could still drive a consensus beat, Bloomberg Intelligence says. 

Amazon (AMZN US) is set for the weakest quarterly revenue growth on record when it reports post-market. Third-party revenue and Prime video sales have spurred growth but the company’s Amazon Web Services business continues to grapple with softening enterprise demand, BI says. Until cloud-services momentum re-accelerates, operating margins remain under pressure.
 

Friday: Chevron (CVX US) and Exxon (XOM US) are due pre-market. The slump in commodity prices during the first quarter likely ended the companies’ recent streak of record-smashing profits. Exxon has announced a hit to profit of as much as $1.8 billion in the quarter, while slower earnings are expected to be seen most in Chevron’s upstream operations. Cash flows remain solid and should adequately cover dividend and buyback commitments, Bloomberg Intelligence notes. And while Chevron has downplayed the possibility of a merger involving international oil supermajors, Exxon could face investor questions on the theme following a media report that it held preliminary talks on a deal with Pioneer Natural Resources.

Exxon and Chevron will hold earnings calls at 8:30 a.m. and 11 a.m. New York time, respectively. The companies are also working separately on low-emissions gasoline alternatives that could keep internal-combustion engines relevant longer, challenging the presumed future dominance of EVs. To read more, see the ESG Stock Watch.