Big tech earnings disappoint:"the trends remain healthy overall"
CGTN Europe interviewed Angelo Zino, Vice President and Technology Equity Research Analyst at CFRA
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00:00All right, well let's take a closer look at what is happening with big tech stocks.
00:04Angelo Zing is Vice President and Technology Equity Analyst at CFRA in New York.
00:10Angelo, thank you so much for joining us.
00:12So we are seeing that stock markets globally have taken quite a hit.
00:16Tech earnings are also mostly, not completely, down.
00:20What is your analysis on what actually is going on with big tech at the moment?
00:26Yeah, so thanks for having me.
00:27So as far as kind of, you know, what we've seen thus far during Q2 earnings season,
00:31I would say execution from big tech has been pretty good.
00:36You know, it's been a little bit mixed in terms of certain business lines kind of beating or missing.
00:42But for the most part, these companies have executed very well in the face of the fact that,
00:47you know, comparisons have gotten definitely a lot more difficult
00:51and are expected to get a lot more difficult in the second half this year.
00:55So all eyes were kind of on the guidance and whether or not they can kind of meet some of those higher expectations out there.
01:01So, you know, that said, you know, it's not necessarily a surprise that we're starting to see some multiple compression during this earnings season.
01:08If you kind of look at tech overall, down about 14% from peak in early July to, you know, to intraday today.
01:17Semiconductors, which was the biggest component within tech, down about 24% from peak to drop over that time period.
01:24So we've seen a really nice correction at this point in time.
01:28And when I think about kind of big tech overall, there's really kind of two key drivers, you know, for most of these mega cap names.
01:36One is digital ad growth. That's clearly a big driver for names like Alphabet, Meta and even Amazon.
01:43And then the other second big trend out there is the cloud.
01:46And both those trends continue to grow very healthy.
01:50It's just the fact that, you know, some might be kind of just slightly missing expectations like a Microsoft with Azure on the cloud side of things.
01:58But still, the trends remain very healthy overall going into the second half this year.
02:03So a lot of, in fact, most of the big tech companies are investing heavily in AI.
02:08Microsoft, Alphabet have seen their market cap fall. NVIDIA also hit somewhat.
02:14The question, I suppose, is the AI hype. Is it beginning to cool? Have some of these companies overinvested?
02:23Yeah, I mean, I wouldn't say they've overinvested at this point in time.
02:26But, you know, I will say that there, you know, there was definitely some kind of elevated multiples.
02:31And the multiples kind of definitely got a little bit ahead of themselves because of some of the AI enthusiasm that is out there.
02:37Again, part of the reason why we've seen some of this pullback here.
02:41But as far as kind of the CapEx spend is involved, we kind of look at things a little bit differently here than maybe others out there.
02:49If you kind of actually look at the CapEx environment from the six biggest spenders out there over the last six, seven years, CapEx spend has actually more than tripled over that time span.
02:58And a big reason for that is a free cash flow of the biggest market cap companies out there continue to significantly improve
03:06because of some of those secular trends I talked about, digital ad spend, the cloud and what have you.
03:12As we kind of look here into 2024 and into 2025, our view is you're going to have higher CapEx spend next year versus this year.
03:20And 2025 won't be the peak either. As long as the fundamentals for these mega cap companies continue to improve,
03:28that should bode well for higher cap spending in future years to come.
03:33So that said, nothing is kind of a straight line up and to the right.
03:37But nonetheless, the companies that are kind of seeing the greatest content growth out there, like a company like NVIDIA and AMD,
03:45we think will be significant beneficiaries not only over the next 12 months, but over the next three to five years.
03:50Thank you so much, Angelo Zing, Vice President and Technology Equity Analyst at CFRA.