Is the AI boom back on?

Is the AI boom back on?

Apple reported stronger than expected earnings on Thursday evening, which has wrapped up a mixed week for US earnings reports. The tech giants have done well and suggest that the gloomy reception to Meta’s results for last quarter was unique. However, there has been weakness for US consumer discretionary, with signs that the least well-off consumers could be struggling as inflation remains high. Starbucks fell sharply and is down 14% so far this week. CVS, the drug store chain, is the weakest performer in the S&P 500 this week after reporting disappointing earnings. McDonalds also reported disappointing earnings earlier this week, and Amazon said that customers were looking for cheaper items in its e-commerce unit.

Apple’s earnings trigger recovery rally for beleaguered tech giant

Tech is leading the bounce back in stocks after strong earnings reports from Apple, Amazon and Google boosted sentiment. Apple reported revenue of $90.75bn, vs. expectations of $90.33bn, net income of $23.63bn, vs. estimates of $23.2bn, and EPS of $1.53, vs. expectations of $1.50. The company also said that the sales slowdown is easing. Although the company refused to give a forecast for iPhone sales, it said that its iPad and service sector business would grow in the double digits this period, and for overall sales growth in the single digits. Its new iPads will be released next week, which could boost sales after a dearth of new products. Added to this, the company is making its first big push into AI. After the company abandoned its driverless car project, Apple lagged in the AI stakes. It said that it is investing in integrating AI into its hardware and software using chips made in-house and concentrating on privacy and security. The latter plays to Apple’s strengths, as its experience with privacy and security on its iPhones and other devices could give it an advantage over its rivals. However, we will hear more about Apple’s AI strategy at as conference in June, and the stock may continue its recovery as we wait for this update.

Apple has been the worst performer out of the Magnificent 7 in recent months, and has fallen more than 7% YTD. However, the market is expecting Apple’s shares to open higher by more than 6% on Friday and a recovery could be underway.

AI’s kit out phase boosts Amazon and Google

AI is a cycle like any other, and so far, the big winners have been those that create the hardware needed to build the AI infrastructure: think Nvidia, AMD, Super Micro Computing etc., as well as those in the cloud computing business: Microsoft and Amazon Web Services, part of Amazon but separate from its ecommerce business. Companies like Meta and Apple are not directly linked to the ‘kit out’ phase, but they are expecting to benefit from the implementation phase, when AI becomes part of everyday life and technology. That is why the AI boom is having a lagged effect on these two tech giants.

Apple’s cautious AI strategy is welcomed by the market

However, the reaction to Apple’s earnings report is a sign that the market is 1, happy with higher-than-expected sales and profit growth even if net margin is lower than the previous quarter, it is not as bad as expected.  2, delighted with a mega buyback plan and 3, also happy with the rate of AI expansion. Apple’s AI strategy has been steady as she goes, which the market likes as it keeps capex spend manageable. In contrast, Meta is moving headfirst into AI and spending a fortune as it does so and the market is less keen on this level of AI enthusiasm.

The Magnificent 7’s varied performance

In the last month, the performance of the Magnificent 7 stocks have varied. Meta is lagging the pack in the short term, as you can see in the chart below. While Apple, Alphabet and Amazon are leading the way. Nvidia does report results for a few weeks, however, we think that it could still report strong results for the coming quarters as its GPUs are central to the kit out of AI for the global economy. Thus, until we move fully to the implementation phase, Nvidia’s results may remain strong.

Chart 1:

Source: XTB and Bloomberg

Overall, AI is still driving tech stocks, however, it is not the only driver. Apple’s mega $110bn stock buyback is also the biggest in US history, is also warming investors to Apple once more. This is bigger than the $90bn buyback announced a year ago. Added to this, the prospect of a less hawkish Fed is also driving tech stocks more generally. The Nasdaq is on track to outperform other US indices this week and is currently up by nearly 1.5% in the last 5 days, vs. 0.3% for the S&P 500 and 0.37% for the Dow.