Magnificent 7 Stocks: US Tech Earnings in Full

Tesla (TSLA), which Cathie Wood recently called “the biggest AI project in the world”, was the first of the big US tech stocks to report and managed to generate excitement despite falling profits. Meanwhile, Microsoft (MSFT) and Alphabet’s (GOOGL) AI progress was rewarded with a big jump in their share prices.

Meanwhile, Meta’s (META) share price fell on caginess around just when its major capital spend on AI will turn into meaningful profit, even with double digit revenue growth.

Here’s what our analysts thought of the companies that have reported so far.

Microsoft – Earnings Beat, Fair Value Hiked

Key Morningstar Metrics for Microsoft Stock

• Fair Value Estimate: $435.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Wide-moat Microsoft (MSFT) continues to deliver with strong third-quarter results, topping both our top- and bottom-line estimates. Results are impressive from most angles, but we highlight strength in AI, Azure, and gaming; a surge in bookings from large Azure deals; and robust margin performance despite downward pressure from the Activision acquisition are our key takeaways.

Shares were up almost 4% after the earnings were published. After looking at the earnings, Morningstar’s analyst raised the fair value estimate for the stock to $435 per share, from $420 previously, after another set of strong quarterly results and stronger near-term growth and profitability. The stock remains in 3-star territory, meaning it is trading within its fair value.

For the March quarter, revenue increased 17% year over year to $61.86 billion, compared with the midpoint of guidance of $60.50 billion. We calculate Activision added about $2.05 billion to revenue. Relative to the year-ago period, productivity and business processes rose 12%, intelligent cloud increased 21%, and more personal computing expanded 17%. AI remains the focal point and contributed 700 basis points to Azure growth. Management also provided a high-level preview for fiscal 2025 that included double-digit revenue growth and operating margin contraction of about 1 percentage point, which is consistent with our model.

Read Dan Romanoff’s full take in this article.

Alphabet – Dividend Surprise, Fair Value Hiked

Key Morningstar Metrics for Alphabet Stock

• Fair Value Estimate: $179.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Alphabet (GOOGL) delivered strong results during the first quarter, with revenue growth accelerating and restructuring efforts driving margin expansion. Total revenue increased 15% year on year versus 13% last quarter, continuing the accelerating trend seen over the past year, though the leap year added about 1% to growth. The firm also instituted a dividend, which will total about $10 billion annually at the initial rate and authorised an additional $70 billion of share repurchases. While growth likely won’t maintain this quarter’s pace throughout this year, Alphabet’s results position it to exceed our expectations for the year.

After releasing the Q1 results, shares jumped 11% in pre-market trading. Morningstar increased the fair value estimate to $179 from $171 per share. With the jump in the stock price following the earnings release, the shares now look fairly valued.

The firm is ramping up efforts to develop artificial intelligence technology, setting expectations that capital investment will continue at the current pace, implying full-year spending of nearly $50 billion versus about $32 billion each of the past two years. Alphabet is taking a tougher stance on costs than its AI rival, continuing to cut headcount and consolidating teams to blunt the impact of infrastructure investments on profitability. Meanwhile, search advertising increased 14%, YouTube advertising surged 21%, and the cloud business also delivered impressive growth, with revenue up 28%, the best result in more than a year.

Read Michael Hodel’s full take in this article.

Meta – Increased Spending, AI in Focus

Key Morningstar Metrics for Meta Platforms Stock

• Fair Value Estimate: $400.00
• Morningstar Rating: ★★ 
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Meta Platforms (META) posted a solid first quarter, with revenue growth at 27%, while modestly disappointing relative to FactSet consensus, putting the firm on a path to exceed our 2024 revenue expectations. The firm also announced increased operating expenses and capital spending. CEO Mark Zuckerberg also noted that he expects a big step up in investment before AI services generate meaningful direct revenue.

Shares fell more than 10% after the Q1 results were announced. After accounting for faster revenue and expense growth in our forecast, Morningstar is leaving its fair value estimate at $400 per share. With the selloff following the earnings release, the stock is trading at a fair value.

Meta’s growth has accelerated across geographies, with the number of daily users across its apps was up 7% versus a year ago. The volume of ads delivered increased 20% year on year, indicating continued strong growth in engagement thanks to improving content recommendations, a practical benefit of recent AI investment. Operating expenses increased 6% compared with a year ago, with headcount increasing for the second consecutive quarter. The operating margin expanded to 38% from 25% a year ago. Capital spending is expected in the range of $35 billion-$40 billion, up from $30 billion-$37 billion previously, and the firm again said that it plans to increase spending further in 2025.

Read Michael Hodel’s full take in this article.

Tesla – Cheaper Cars, Fair Value Hiked

Key Morningstar Metrics for Tesla Stock

• Fair Value Estimate: $200.00 
• Morningstar Rating: ★★★★ 
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High 

Morningstar’s analyst Seth Goldstein had four takeaways from Tesla’s (TSLA) quarterly earnings, which showed a fall in profits. First, the affordable vehicle is still on track for first deliveries by the end of 2025. Second, the full self-driving subscription software, or FSD, is seeing stronger adoption. We estimate over 10% of the eligible fleet has adopted subscription software, which is above our prior forecast. 

Third, we raised our energy storage volume growth forecast. Energy storage volumes increased at just 4% year over year in the first quarter. Finally, we slightly raised our 2024 deliveries forecast, versus our prior forecast for no growth. Our improved outlook is due to Tesla’s recent price cuts, so we also slightly reduced our near-term automotive gross margin forecast. We think Tesla could cut prices further as management aims to pass along the majority of cost savings to customers to drive demand.

Shares were up over 10% in after-hours trading as the market reacted positively to management’s outlook. We’ve raised our fair value estimate for the stock to $200 per share from $195 following first-quarter earnings, due to an improved near-term outlook. At current prices, we view Tesla as undervalued, with the stock trading in 4-star territory.

Read Seth Goldstein’s full take in this article.

Amazon – Cloud Growth Drives Profits

Key Morningstar Metrics for Amazon Stock

• Fair Value Estimate: $193.00
• Morningstar Rating: ★★★ 
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High 

We are raising our fair value estimate for wide-moat Amazon to $193 per share from $185 previously, after it reported good first-quarter results. The company’s second-quarter outlook was shy of our aggressive estimates, while it noted plans to materially increase data centre investments in 2024 to meet generative AI demand.

Changes to our model are modest but centre around continued profitability enhancements. Many positive trends from the last several quarters continued with notable improvement in AWS demand and additional cost savings arising from fulfilment and cost to serve. Strong quarterly performance has pushed the shares meaningfully higher over the last year, and as such, we see only a modest upside to our fair value for investors.

Overall demand continues to trend favourably across business units. First-quarter revenue grew 13% year-over-year as reported and 13% in constant currency and came in at $143.3 billion, compared with the high end of guidance at $143.5 billion. Relative to our estimates, most of the upside was derived from online stores, advertising, and Amazon Web Services while physical stores, third-party seller services, subscriptions, and other were generally in line. The two key segments, AWS and advertising, increased 17% and 24%, as reported, respectively, over the year-ago period. Amazon’s advertising growth has bested its large internet peers over the last year or so, while AWS’ growth accelerated both year over year and sequentially.

Margins remain a bright spot, and we continue to believe there is room for expansion. First-quarter profitability was impressive, with operating profit at a best-ever $15.3 billion, compared with the high end of guidance at $12.0 billion. This resulted in an operating margin of 10.7%, compared with 3.7% a year ago. Even the international business generated positive operating profits for the first time in more than two years, which bodes well for the long term.

Read Dan Romanoff’s full take in this article.

Apple – Hope for a Better 2025 on New iPhone

Key Morningstar Metrics for Apple Stock

• Fair Value Estimate: $170.00
• Morningstar Rating: ★★★ 
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

We raise our fair value estimate for wide-moat Apple to $170 per share from $160, behind higher expectations for iPhone and services revenue in the medium term. Apple’s March-quarter results were aligned with our model, although June-quarter guidance was below our rosy expectations. We expect a soft fiscal 2024 for Apple, driven by headwinds to iPhone revenue in China and slower iPhone refreshes globally.

However, we raised our forecast for iPhone revenue growth in fiscal 2025 in anticipation of a stronger refresh cycle for the iPhone 16 in fall 2024 (Apple’s first fiscal quarter.) We expect Apple’s generative artificial intelligence product announcements this year will drive improved growth next year. Shares rose after hours in line with our valuation raise, which we attribute to lower iPhone downside out of China than investors may have feared. Shares look fairly valued to us.

March-quarter revenue declined 4% year over year to $90.8 billion, in line with our model. IPhone revenue is Apple’s primary driver, and it fell 10% year over year. The year-over-year comparison was affected by $5 billion in revenue last year, pushed into the March quarter due to supply constraints in the December quarter. Adjusting for this, iPhone and total Apple revenue was closer to flat year over year. We still view current iPhone revenue levels as soft, with more domestic competition in China and slowing refresh cycles globally as headwinds to growth. Apple’s services revenue continues a strong growth trajectory and rose 14% year over year. We believe that services growth is benefitting from higher payments from Google for its default position in Safari and the broadly higher utilisation of Apple’s ecosystem despite softer iPhone unit sales.

June-quarter guidance missed our optimistic expectations but aligned with FactSet consensus estimates. Apple is guiding for low-single-digit year-over-year growth, which we think implies flat iPhone revenue and double-digit services growth.

Read William Kerwin’s take in the full article.