Tech stocks have had a strong start to 2024, driven by optimism over Fed rate cuts this year and better-than-expected quarterly reports from several of the Magnificent Seven companies. Vitali Mossounov, Director and Co-Lead of Fundamental Equity Research at TD Asset Management, discusses whether they can keep that momentum going the rest of the year.
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* We are about halfway through earnings season in the United States, with a significant number of earnings beats that includes some of the big names in technology, but not all of them have had good stories to tell. Here with a roundup is Vitali Mossounov. He is Colead of Fundamental Equity Research at TD Asset Management. It is a pleasure having you here.
* Pleasure to be here, Kim.
* Let's start with, I guess, just the expectations because given the stock prices and what was priced in, expectations were high. So are they delivering?
* Expectations are going to be high when you're following an outstanding year like tech companies had in 2023. And let's take a walk down memory lane here. Entering 2023, there was a new year's resolution that these companies made. And it was that they're going to exercise, and they're going to have a very good diet.
* [LAUGHS]
* What I mean by that is they're going to dedicate themselves to improving revenue growth. That's the exercise. And they'll tighten their belts and control costs. I personally don't stick to my new year's resolutions very well, but they did. Revenue went higher. Costs went lower. And the stocks did very well.
* Now we get to the fourth quarter earnings season. How did they do? Did they deliver? Absolutely. And I've got a little chart that I've brought that summarizes some of the data for those keeping score at home. But really, revenue growth-- we'll start at the top. 15% growth across that group of the big five tech stocks. That's good in any environment. And then, of course, margins going way higher and earnings doubling year over year. So yeah, Kim, I'd say they delivered.
* It's interesting-- and I know you'll talk about these individually in a second because some of these margins went way, way, way higher. But you talk about the diet. This is also a year of efficiency coming out from these companies as well, which meant there were layoffs in order for them to get those margins that they had at the same time. So are we going to see that continued belt tightening or efficiency going forward?
* Enormous efficiency. Again, you can see it in the numbers on that table. And remarkably-- I mean, these were companies that were profligate spenders. They hired. They spent the big bets. They would do anything they want, historically-- send air balloons to Mars. That's probably not a real project. But you know what I'm talking about.
* [LAUGHS]
* Last year, headcount. We got a role for that as well in the table. Headcount down 6% across the group. Unimaginable just a year ago. And that's each one of these big five companies reducing headcount. Very much a year of efficiency. That's the diet, if you will. And going forward-- I may be in the minority but I actually think that that continues for some time.
* Remember, they've learned new behaviors. They've learned to operate in a leaner, better way, one would say. And as all of us, when we learn to do things better and we're rewarded by it, both by shareholders and our own employees, we tend to remain with those behaviors. Do I think headcount is down again next year? No, I don't think so. These companies are signaling that there is some investment that they need to make in staff. But I think we're going to get into a new era of just low-to-mid single-digit growth in employee base.
* I want to bring up that chart again if we could, just to take a look at it, because to your point, you see the headcount coming down right across the board, and again, some significantly more than others. But the CapEx growth, a bit varied, as you look in terms of what's happening with those companies. So let's talk about what you see for the upcoming year because it's AI, AI, AI, over and over. And people tend to think, is it too much about AI, or is it just getting started? Is that where the CapEx is going to keep going?
* Yeah, some say they're just shifting the calories, and now you've got, maybe, lower operating expenses, primarily labor. But gosh, look at that CapEx, the capital outlays, up 10% year over year in the fourth quarter of 2023. And as I think about how this current year, 2024, will happen, I think maybe we're even looking at a 20% increase in capital costs.
* So look, why aren't investors punishing the companies for this type of spending? Well, the words give it away. It's capital spending. And we'll use the analogy of a mining company. If they're developing a mine and sinking all that capital into the ground, presumably, in one to five years, there should be some kind of ore or some kind of deliverable that gets extracted and sold. The investors wait for that.
* In this case, the capital, as you said and alluded to, is for these AI investments, the computing infrastructure to support it. Investors believe in the narrative. We've had early signals from companies that there is demand from enterprises, from industries, from you and I, in some way, shape, or form. And right now they're getting a pass for that spending.
* Yeah, that spending also, too-- we'll talk about some actual company names here, too, but NVIDIA being the darling, of course, on the chip side, too. Do you see that growth continuing?
* Well, NVIDIA-- the numbers are remarkable. It's the talk of the town. [LAUGHS]
* Yeah.
* Imagine five years ago, $10 billion in sales. This year, about to wrap up. We're looking at around $60 billion in sales, from 10 to 60. And some of the companies we'll talk about shortly, just to make that connection back to capital spending and ahead to these companies-- five years ago, these big five tech companies, $80 billion in CapEx.
* Today we're looking at more like 160, 170. And that's really all those extra dollars going to NVIDIA as that supplier, that arms dealer of AI innovation and technology. And every signal right now is that is being supported through '24. And then, of course, we're waiting to see just the extent-- to the extent to which demand will be there.
* Let's talk about some of those other companies and run through them if we could. We'll bring up some charts. Start with Amazon. Your outlook for them.
* Amazon had a very good quarter. It's really a company that's all about retail and the cloud. And if you think about Amazon's retail, growth is stable on the top line. Margins are improving as they're learning to run that network, that large logistical network better and more efficiently. And the cloud-- that demand is stable-- in fact, maybe inflecting higher. So shares were up 8%. It's a good quarter for Amazon.
* Meta-- [LAUGHS] with the 2,100, I'm seeing, basis point change in profit margin, and of course, that dividend.
* Yes, and I think a 20% lower headcount reduction, so really-- and a dividend. So much going on at Meta, and the share price reflects that, the reaction the next day. But that's a company about advertising, growth, and demand. That's the primary KPI. It's growing quickly. Over 20% revenue growth, and accelerating investors like that, as you just pointed out.
* Margins are under control, and that dividend is just a signal to investors that, we've grown up. We're an adult. Here is the next leg of capital allocation that you might expect from a railroad. And yet, here we are, Meta, dividend.
* Yeah, well, it's a railroad of a different type, I guess, but anyway.
* Yes.
* Yeah. Microsoft-- once, I would say, probably three years ago, people would not predicted the darling that it's become right now.
* It is. Remarkably consistent, and again, another quarter of great performance. For them, it's mostly about the cloud. A multifaceted business, but cloud, Azure, stabilizing, just like AWS, to inflecting higher. Costs under control. We keep repeating that because it's a theme. And shares actually sold off a little bit on that, which I think is a bit deceiving. It's just when stocks have a big rally, expectations are high. I caution people to be careful with that one-day share price reaction.
* And let's round it up with Google and Apple.
* Yeah. Google was, I would say, a bit disappointing based on the share price reaction again. But more about expectations. Actual results, 15% revenue growth. Margins are expanding. Headcount is down. Google was a good quarter.
* And Apple, yes.
* Apple. Sorry. Almost forgot about Apple. It's kind of the most boring of the bunch--
* I know, right?
* --right? It is. But boring is good, in a sense. 2% revenue growth. They buy back stock. They expand margins. Mid to high teens EPS growth. It's just that they're seeing headwinds in China. The iPhone is somewhat of a mature product. Investors are more looking and waiting to see, does AI cause an upgrade cycle for the phone? And what's this Vision Pro? What's this AR/VR headset all about? But TBD.
* Yeah.
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* We are about halfway through earnings season in the United States, with a significant number of earnings beats that includes some of the big names in technology, but not all of them have had good stories to tell. Here with a roundup is Vitali Mossounov. He is Colead of Fundamental Equity Research at TD Asset Management. It is a pleasure having you here.
* Pleasure to be here, Kim.
* Let's start with, I guess, just the expectations because given the stock prices and what was priced in, expectations were high. So are they delivering?
* Expectations are going to be high when you're following an outstanding year like tech companies had in 2023. And let's take a walk down memory lane here. Entering 2023, there was a new year's resolution that these companies made. And it was that they're going to exercise, and they're going to have a very good diet.
* [LAUGHS]
* What I mean by that is they're going to dedicate themselves to improving revenue growth. That's the exercise. And they'll tighten their belts and control costs. I personally don't stick to my new year's resolutions very well, but they did. Revenue went higher. Costs went lower. And the stocks did very well.
* Now we get to the fourth quarter earnings season. How did they do? Did they deliver? Absolutely. And I've got a little chart that I've brought that summarizes some of the data for those keeping score at home. But really, revenue growth-- we'll start at the top. 15% growth across that group of the big five tech stocks. That's good in any environment. And then, of course, margins going way higher and earnings doubling year over year. So yeah, Kim, I'd say they delivered.
* It's interesting-- and I know you'll talk about these individually in a second because some of these margins went way, way, way higher. But you talk about the diet. This is also a year of efficiency coming out from these companies as well, which meant there were layoffs in order for them to get those margins that they had at the same time. So are we going to see that continued belt tightening or efficiency going forward?
* Enormous efficiency. Again, you can see it in the numbers on that table. And remarkably-- I mean, these were companies that were profligate spenders. They hired. They spent the big bets. They would do anything they want, historically-- send air balloons to Mars. That's probably not a real project. But you know what I'm talking about.
* [LAUGHS]
* Last year, headcount. We got a role for that as well in the table. Headcount down 6% across the group. Unimaginable just a year ago. And that's each one of these big five companies reducing headcount. Very much a year of efficiency. That's the diet, if you will. And going forward-- I may be in the minority but I actually think that that continues for some time.
* Remember, they've learned new behaviors. They've learned to operate in a leaner, better way, one would say. And as all of us, when we learn to do things better and we're rewarded by it, both by shareholders and our own employees, we tend to remain with those behaviors. Do I think headcount is down again next year? No, I don't think so. These companies are signaling that there is some investment that they need to make in staff. But I think we're going to get into a new era of just low-to-mid single-digit growth in employee base.
* I want to bring up that chart again if we could, just to take a look at it, because to your point, you see the headcount coming down right across the board, and again, some significantly more than others. But the CapEx growth, a bit varied, as you look in terms of what's happening with those companies. So let's talk about what you see for the upcoming year because it's AI, AI, AI, over and over. And people tend to think, is it too much about AI, or is it just getting started? Is that where the CapEx is going to keep going?
* Yeah, some say they're just shifting the calories, and now you've got, maybe, lower operating expenses, primarily labor. But gosh, look at that CapEx, the capital outlays, up 10% year over year in the fourth quarter of 2023. And as I think about how this current year, 2024, will happen, I think maybe we're even looking at a 20% increase in capital costs.
* So look, why aren't investors punishing the companies for this type of spending? Well, the words give it away. It's capital spending. And we'll use the analogy of a mining company. If they're developing a mine and sinking all that capital into the ground, presumably, in one to five years, there should be some kind of ore or some kind of deliverable that gets extracted and sold. The investors wait for that.
* In this case, the capital, as you said and alluded to, is for these AI investments, the computing infrastructure to support it. Investors believe in the narrative. We've had early signals from companies that there is demand from enterprises, from industries, from you and I, in some way, shape, or form. And right now they're getting a pass for that spending.
* Yeah, that spending also, too-- we'll talk about some actual company names here, too, but NVIDIA being the darling, of course, on the chip side, too. Do you see that growth continuing?
* Well, NVIDIA-- the numbers are remarkable. It's the talk of the town. [LAUGHS]
* Yeah.
* Imagine five years ago, $10 billion in sales. This year, about to wrap up. We're looking at around $60 billion in sales, from 10 to 60. And some of the companies we'll talk about shortly, just to make that connection back to capital spending and ahead to these companies-- five years ago, these big five tech companies, $80 billion in CapEx.
* Today we're looking at more like 160, 170. And that's really all those extra dollars going to NVIDIA as that supplier, that arms dealer of AI innovation and technology. And every signal right now is that is being supported through '24. And then, of course, we're waiting to see just the extent-- to the extent to which demand will be there.
* Let's talk about some of those other companies and run through them if we could. We'll bring up some charts. Start with Amazon. Your outlook for them.
* Amazon had a very good quarter. It's really a company that's all about retail and the cloud. And if you think about Amazon's retail, growth is stable on the top line. Margins are improving as they're learning to run that network, that large logistical network better and more efficiently. And the cloud-- that demand is stable-- in fact, maybe inflecting higher. So shares were up 8%. It's a good quarter for Amazon.
* Meta-- [LAUGHS] with the 2,100, I'm seeing, basis point change in profit margin, and of course, that dividend.
* Yes, and I think a 20% lower headcount reduction, so really-- and a dividend. So much going on at Meta, and the share price reflects that, the reaction the next day. But that's a company about advertising, growth, and demand. That's the primary KPI. It's growing quickly. Over 20% revenue growth, and accelerating investors like that, as you just pointed out.
* Margins are under control, and that dividend is just a signal to investors that, we've grown up. We're an adult. Here is the next leg of capital allocation that you might expect from a railroad. And yet, here we are, Meta, dividend.
* Yeah, well, it's a railroad of a different type, I guess, but anyway.
* Yes.
* Yeah. Microsoft-- once, I would say, probably three years ago, people would not predicted the darling that it's become right now.
* It is. Remarkably consistent, and again, another quarter of great performance. For them, it's mostly about the cloud. A multifaceted business, but cloud, Azure, stabilizing, just like AWS, to inflecting higher. Costs under control. We keep repeating that because it's a theme. And shares actually sold off a little bit on that, which I think is a bit deceiving. It's just when stocks have a big rally, expectations are high. I caution people to be careful with that one-day share price reaction.
* And let's round it up with Google and Apple.
* Yeah. Google was, I would say, a bit disappointing based on the share price reaction again. But more about expectations. Actual results, 15% revenue growth. Margins are expanding. Headcount is down. Google was a good quarter.
* And Apple, yes.
* Apple. Sorry. Almost forgot about Apple. It's kind of the most boring of the bunch--
* I know, right?
* --right? It is. But boring is good, in a sense. 2% revenue growth. They buy back stock. They expand margins. Mid to high teens EPS growth. It's just that they're seeing headwinds in China. The iPhone is somewhat of a mature product. Investors are more looking and waiting to see, does AI cause an upgrade cycle for the phone? And what's this Vision Pro? What's this AR/VR headset all about? But TBD.
* Yeah.
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