A tough post-earnings trade for Alphabet last week despite a very strong Google Cloud readout raises the stakes for this week’s hyper-scaler reports.
Recall that cloud revenue grew more than 80% YoY at Alphabet, a far better result than analysts expected. Indeed, I’d go so far as to call the cloud print a blowout. The $2.5-billion beat counted as 12% upside to consensus, and on the line that mattered most.
Or maybe cloud wasn’t the line that mattered most, and that gets quickly to the crux of the issue. On the call, Alphabet said capex this year would be $195-$205 billion, up from last quarter’s guide. Investors were already concerned about outlays at Alphabet, particularly in the context of escalatory borrowing and a massive equity raise to offset cash burn. The upside capex guide added to investor consternation, hence the stock’s worst day (July 23) in over a year.
That’s a pretty daunting setup for Amazon and Microsoft. It suggests even big upside surprises for AWS and Azure won’t be sufficient in and of themselves to quell investor angst if capex is deemed “too” high. Meta doesn’t have a cloud business (yet), but Mark Zuckerberg’s grappling with the same nascent investor revolt over runaway spending.
(At least Zuckerberg has some experience in that regard. He faced down a veritable rebellion over metaverse spending in 2022. Mark came away from that debacle mostly unscathed, if you don’t count a corporate rebrand which now finds the company named after its least successful endeavor.)
Anyway, the point of all that’s actually to remind you that as crucial as Mag7 results are, they aren’t the only thing that matters anymore.
As the figure above, from Nomura’s Charlie McElligott, shows, the “S&P 493” will contribute a lot more in the way of EPS growth this quarter versus last.
“The bullish story in US equities earnings is no longer just about the Mag7 because the capex ‘trickle-down’ is feeding into the other 493 in a big way,” he wrote.
The figures below show you the side-by-side comparison, which is easier on the eyes than the stacked version if you’re trying to discern the trend.
The rest of the names in the index are set to see their contribution to overall earnings growth nearly triple in just three quarters. Thats “an extremely constructive earnings breadth impulse,” McElligott went on.
The rub — and Charlie knows this just as well as anyone — is that the vast majority of the “broadening” out is a function of huge upside revisions to profit estimates for a handful of semi names. That makes “broadening” a bit of a misnomer (hence the scare quotes).
Coming full circle, we’re left with a catch-22:
- If the hyper-scalers guide capex aggressively, that’s bullish for semis, which’ve taken the EPS growth baton. But judging by the reaction to Alphabet’s report, it’d be bearish for the mega-cap leadership (sans Nvidia and Apple), which by definition commands enormous weight in the index.
- If, on the other hand, Amazon, Meta and Microsoft guide capex conservatively or even just tip an inclination to tap the brakes, that could be near-term supportive for the hyper-scalers if indeed capex worries now trump growth. But it’d be a (very) bad omen for chip stocks, which are trying to sustain a rebound from a bear market.
Well put, sir. It almost seems like a sure lose-lose, doesn’t it?
Mr. Doublethink here worries that it just can’t be that obvious. Will the BTFD Brigade come to the rescue?
December 9. That’s the day Micron is allowed to start repurchasing shares (lockup from CHIPS Act). I don’t expect much help before then. I’m not sure if any other companies are in the same lockup, but I assume there are some
If AI is going to be as beneficial for humankind as marketed, it needs to address spam and bots. How “smart” can AI be if it can’t fix that. Is something devious going on or is it all a big scam. Inquiring minds would like to know.
It’s been a huge benefit to the spammers and bot makers. Remember the good old days when you could tell a spam email at a glance because of the bad English? Now they don’t even need humans to make the spam phone calls either. The spam filters on my phone are still essentially useless, just as many legitimate customers show up as spam as spam callers showing up as legitimate. All in all, still a net loss to humanity on that front in my opinion.
A co-worker from years gone by gave me his rule for government paperwork received in the mail. Toss it. If it comes again, toss it again If it comes back with a return card attached, respond. I do that with my phone. I only have a land line and I rarely answer it unless it is an expected call. I check for messages. If there isn’t one, I go about my business. Two or more repeat calls and/or a message I probably will respond. Little to no spam results. I can mostly tell the AI because of mistakes as well.
I’m in the unenviable position of needing to answer customer calls to get work (I know, so old school). The best customers seek ME out and will leave a message, but most will just move on to the next guy if I don’t answer.
I’m not complaining about being self-employed, I wouldn’t have it any other way, but the pestilent robo-callers are the bane of my existence.
Aside from the chip sector, what are the other areas that will benefit from the increased capex spend that up to now really have not.
What are the semis going to do with all their new found FCF? Micron’s up 729% over the last year, but ASML is up “only” 148%.