Calendar third quarter earnings from the so-called ‘Magnificent Seven’ revealed a stark divide this year, with the tech giants delivering mixed results that are reshaping stock performance expectations.

Of the six ‘Magnificent Seven’ stocks that have reported results already, the market didn’t like three; Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ), and Meta Platforms (META:NASDAQ), loved what Tesla (TSLA:NASDAQ) posted, and gave a thumbs-up to both Alphabet (GOOG:NASDAQ) and Amazon (AMZN:NASDAQ).

Earnings demonstrate sustained momentum across cloud computing, digital advertising, and hardware. ‘Aside from Apple, which is likely no longer a growth company, the other Mag Seven companies are not only generating impressive top and bottom-line growth today, but the trend is expected to remain in place at least through next year, if not beyond,’ said Sheraz Mian, head of research at Zacks.

Microsoft’s earnings increased more than 10% on a 16% rise in revenues year-on-year, while Meta’s earnings jumped 35% on 19% revenue growth. Both companies beat top and bottom-line consensus estimates.

‘If one was nitpicking the results from these two companies, then signs of deceleration in Microsoft’s cloud revenues and Meta’s advertising revenues would be the only operating issues here,’ said Mian. Microsoft’s Azure cloud computing platform saw revenue growth of around 33%, robust but down on previous quarters.

Yet the real issue for investors is the enormous piles of cash Magnificent Seven companies are throwing at AI (artificial intelligence), something that the group remains committed to through 2025 and beyond. Meta, for example, expects to increase AI spending to as much as $40 billion, the company said.

An antidote to these concerns will be evidence of fatter profit margins, an area where Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity Fund (BCLYMF3) sees substantial progress, particularly from Amazon and Alphabet in latest earnings.

‘Despite the heavy AI investment programme, Amazon succeeded in increasing its operating margin, boosting net income by more than 50%, and doubling its free cash flow.’

Smit also thinks Alphabet’s latest results should put many sceptics’ minds to rest given operating margin increased from 28% to 32% even in the face of elevated AI capital expenditure.

‘Alphabet generated free cash flow of over $17 billion, more than a third in excess of the total capital expenditures. One wonders what else shareholders realistically could have wished for,’ said Smit.

AI chips firm Nvidia (NVDA:NASDAQ) is set to report earnings on 20 November 2024. 

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