AI Boom Fades as Fundamentals Weaken: Earnings Recap

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Most of the big earnings reports have now occurred, and so far they’ve done little to boost the market.

Companies like Microsoft (MSFT), Meta Platforms (META), Netflix (NFLX), Caterpillar (CAT) and Intel (INTC) reported profits above Wall Street estimates. However their stocks have pushed lower as investors see potentially bigger negatives. Is the Artificial Intelligence boom that lifted markets early this year stalling?

META took one of the biggest hits overall. The social-media giant managed to beat earnings and revenue estimates, but it stunned Wall Street by increasing planned capital expenditures by 10 percent. The news diminished Mark Zuckerberg’s image as a cost-conscious CEO. META also forecast second-quarter revenue of roughly $37.75 billion, about $500 million below consensus.

That combination of news was a negative for profitability. It highlighted the potentially high cost of AI investments, while raising questions about growth in newer products like Reels. META had its biggest drop in 18 months as a result.

Meta Platforms (META), daily chart, showing key events.

NFLX also plunged despite earnings and revenue increasing more than Wall Street expected. The streaming giant’s problem was that management plans to stop reporting its subscriber count each quarter. The change will deprive investors of a key growth metric, suggesting that its days of quickest expansion could be ending.

Intel, Caterpillar

INTC had its worst month since June 2002, dropping 31 percent before and after its results. (It was also the second-worst performer in the S&P 500 in April and the weakest member of the Dow Jones Industrial Average, according to TradeStation Data.)

Profitability and growth worries were the big issues. The once-mighty chipmaker expects to earn just $0.10 a share in the current quarter, less than half the $0.25 expected by Wall Street. Revenue was also forecast 4 percent below consensus. The news cast further doubt on INTC’s turnaround under CEO Pat Gelsinger. Did you know its market value has now fallen behind other semiconductor names like Texas Instruments (TXN) and Applied Materials (AMAT)?

Intel (INTC), daily chart, showing moves after quarterly results.

Industrial giant CAT began April already up 24 percent on a year. But it reversed in the second week and continued lower even after earnings beat estimates. The problem was revenue missed consensus by 1 percent and inventories increased by 2 percent. That made analysts suspect demand could be weakening.

Alphabet Rallies

Alphabet (GOOGL) was one of the best performers this earnings season. Top- and bottom-line results beat estimates as YouTube advertising rebounded. Profit margins at its Cloud division tripled, reversing weakness the previous quarter. Those stronger fundamentals let CEO Sundar Pichai increase the stock buyback program and introduce a quarterly cash dividend.

Perhaps most important was a change in perception: Three months ago, investors worried AI would threaten GOOGL’s core business. But now Wall Street sees potential for the company to benefit as a provider of cloud infrastructure. Attention could now focus on the use of its Gemini AI model for enhancing tradition search. This initiative is called Search Generative Experience, or SGE.

Alphabet (GOOG), daily chart, showing rally after quarterly results.

PayPal (PYPL) was another company that benefited from improvements to its core business. Earnings and revenue beat as the payments provider increased transactions per user. PYPL has reduced its headcount and changed its reporting metrics under Alex Chriss, who became CEO last September. Some investors may view it as a potential turnaround play.

Amazon, Advanced Micro

Amazon.com (AMZN) announced mixed numbers this afternoon: Backward-looking earnings and revenue beat estimates — including at its key AWS division. However revenue guidance was about 2 percent lower than consensus. The e-commerce stock was little changed on the news, holding its range over the last week.

Advanced Micro Devices (AMD) and Super Micro Computers (SMCI) both fell after hours. Both rode the wave of AI enthusiasm early this year and announced results more or less in line with expectations. But they failed to give additional positive commentary.

Starbucks (SBUX) was another big mover Tuesday afternoon. The coffee chain’s earnings, revenue and same-store sales missed estimates. A 6 percent drop in transactions erased the benefit of price increases and cost cuts. The stock traded under $77 after hours, an area last seen in July 2022.

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