Earnings season has kicked off in the world of Big Tech, with Google’s parent company Alphabet and Tesla the first to report yesterday, 23 July.
The remaining five members of the so-called “ Magnificent Seven ” will report over the course of July and August, with the much-hyped chipmaker Nvidia set to close the season out on 28 August.
Investors will be hoping for a big finale from Nvidia, which has been vying with Microsoft and Apple for top spot as the world’s most valuable company in recent months.
The stock has been a big talking point among investors and non-investors alike, and has thrust the technology sector into the spotlight thanks to its extraordinary returns. If you had invested in the chipmaker five years ago, you would have seen the value of your shares rise by almost 2,700%.
Share price gains from other members of the Magnificent Seven pale by comparison when held alongside Nvidia, but remain impressive in their own right. Microsoft is up almost 215% over the past five years, while Alphabet is up almost 194%.
E-vehicle manufacturer Tesla has been more of a mixed bag. It is up a whopping 1,500% over the past five years. However, investors would have lost money if they invested at its peak in November 2021, as the stock has almost halved in value since then.
When you see returns like these, it is easy to understand why the S&P 500 has enjoyed such strong growth in recent years. The US equity market is heavily exposed to the technology sector, while stock market indices like the FTSE 100 have lagged behind thanks to the UK’s tech drought.
Despite this, investors are starting to ask themselves whether Big Tech companies could ultimately suffer the Icarus effect. Have valuations become stretched, and are investors flying too close to the sun in search of glittering returns?
We look at the latest developments so far this earnings season.
Alphabet results beat expectations but share price falls
Google’s parent company Alphabet beat analyst expectations when it announced its second-quarter results yesterday, with revenues up 14% year-on-year.
Despite this, the stock fell back in pre-market trading as investors reacted negatively to capital expenditure of more than $13 billion in the quarter – more than double the amount spent in the same period last year.
The company has been investing heavily in its AI capabilities recently, as competition heats up in this area. Chief executive Sundar Pichai says the company is “innovating at every layer of the AI stack”.
Although the AI race is well and truly underway, Alphabet’s share price reaction indicates some scepticism among investors.
Steve Clayton, head of equity funds at Hargreaves Lansdown, described pre-market trading activity as “investors [querying] whether the vast sums being invested into Google’s AI capabilities were actually earning a return”.
Is Tesla running out of road?
Yesterday was a disappointing day for Tesla shareholders, who hit another roadblock in what has already been a bumpy year for the e-vehicle company. Although total sales were up 2%, profits plunged 45% year-on-year to $1.48 billion.
This was driven by falling vehicle deliveries, as well as Tesla cutting the price on some of its models in an attempt to boost demand. The company also reported an increase in its operating expenses, largely driven by AI projects.
This continues a troubling pattern for the company, led by chief executive Elon Musk . The first four months of the year were bad for Tesla, with its shares losing more than 40% of their value thanks to falling sales, supply chain issues, and a weak consumer backdrop.
The share price has recovered some of these losses since, after Musk announced plans to launch a new, more affordable e-vehicle model. However, yesterday’s results have prompted further selling. The share price is now down just under 13% year-to-date.
“Tesla’s financial performance is more erratic than a learner driver, having now missed earnings expectations for the fourth quarter in a row,” says Dan Coatsworth, investment analyst at AJ Bell.
In Coatsworth's view, the company is too focused on launching the next initiative rather than focusing on its existing business.
He adds: “There is a lot of talk about robotaxis, humanoid robots and autonomous driving, which provides an exciting narrative for investors but doesn’t get over the fact that these are tomorrow’s potential riches, not today’s.”
Some investors will be starting to lose patience with the e-vehicle manufacturer after another round of disappointing results.
What else can we expect from Big Tech this earnings season?
Five of the Magnificent Seven tech stocks are yet to report, which means investors will be watching closely over the weeks to come. Nvidia is the big one that everyone is waiting for – its results will be released on 28 August.
In recent years, stocks like Nvidia have given the impression that the only way is up. However, in Clayton’s view, the jury is still out.
He says: “AI has been such a driver of expectations and has led to an extraordinary surge in revenues for Nvidia as the hyperscalers like Google, Amazon and Microsoft’s cloud units race to build capacity. But at some point, that scale has to start delivering returns on capital and, so far, the jury is out.”
Despite this, Nvidia has said it expects its second-quarter revenue to come in at around $28 billion, plus or minus 2%. This would mark another year-on-year and quarter-on-quarter rise.
Reports also emerged this week that the company could be preparing a version of its new flagship AI chip for the Chinese market. Reuters broke the story, and suggested this development could help Nvidia fend off competition from the likes of Huawei and Tencent-backed Enflame.
US export controls have dampened Nvidia’s revenues in China in recent years, so investors will be watching this development closely.
Should you invest in Big Tech?
You might already hold some Big Tech stocks in your portfolio – even if you’re not necessarily aware of it. For example, some US and global equity ETFs are heavily exposed to the sector. The Magnificent Seven currently make up around 30% of the S&P 500 and around 20% of the MSCI World index.
Likewise, it is possible you hold some of these companies in your pension . Analysis from PensionBee earlier this year revealed that around 10% of defined contribution pension savers’ money in the UK is invested in US tech giants.
With this in mind, you may feel you already have enough exposure to the sector. In fact, some investors may want to mitigate against concentration risk by reducing their tech exposure, in case valuations come crashing down.
A lot will depend on how the AI race develops, and if technological developments deliver on their promise of transforming the world around us.
In the meantime, investors will be keeping a close eye on the Magnificent Seven tech stocks as they announce their earnings in the coming weeks – particularly as the group's fortunes are starting to diverge in some places.
A lot could depend on the economic environment too, particularly for companies like Tesla, which sell luxury products. If interest rates come down later this year, reducing the burden on household expenses, consumers could be left with more disposable income to spend on discretionary items.
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