Wall Street is bullish on Big Tech heading into earnings — here's what we think

Published Tue, Jul 18 20236:00 AM EDT

Wall Street kicked off the week with bullish takes on several high-flying tech stocks in the portfolio — validating our decision to stick with these mega-caps heading into quarterly earnings. Shares of Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT) and Meta Platforms (META) received price target hikes on Monday, signaling a view amongst many analysts that the tech big winners so far this year will keep on winning. It's sound judgment, given their strong underlying fundamentals, plus their ability to pull investor dollars looking for exposure to artificial intelligence. Nvidia rose 215% year to date, Meta gained 57%, Apple popped 49%, and Microsoft advanced 44%. Raising targets ahead of earnings in the coming days and weeks for each of these companies also shows a generally positive outlook for their respective industries: consumer tech (Apple), social media (Meta), cloud and enterprise (Microsoft), and semiconductors (Nvidia). Not all of our mega-caps got upbeat notes. Advanced Micro Devices (AMD) was put on a "negative catalyst watch" by analysts at Citigroup. It's also important to understand that some price target raises are just chasing a big move, and that the price reaction to an earnings release has less to do with the results and much more to do with expectations. After all, a smaller loss than expected is a positive, even if it is a loss. How a stock is moving coming into the print is also important. For example, stocks rallying into a release set the "bar" for another move that much higher. However, we take these bullish updates as good signs that we largely agree with. Here's a breakdown of what the analysts had to say, plus our takes on the reports: Nvidia & AMD What the analysts say: Citigroup analysts reiterated their buy rating on Nvidia while raising the price target to $520 from $420, plus a "bull case" of $600 per share. The target increase is predicated on growing graphics processing unit (GPU) demand," a "deeper understanding" of the competitive landscape as it relates to Advanced Micro Devices and the growing adoption of generative AI. The analysts noted that management has previously highlighted a $1 trillion central processing unit (CPU) market that is up for grabs as companies turn to the next evolution of data center computing with GPUs. The opportunity in GPUs skews to Nvidia's favor thanks to its software and networking capabilities. It's also why Citigroup also put AMD on a "negative catalyst watch," meaning it is negative on the stock heading into earnings. In studying the landscape, the analysts noted that while AMD's MI250 chip (recall we're looking forward to the MI300 AI chip later this year or early 2024) coupled with various open source software solutions (such as Meta's "Pytorch2.0") can achieve speeds of about 80% of what Nvidia's A100 can do, it is their belief that "the remaining 20% gap is primarily tied to its own software and networking (both across nodes and GPUs), which by all indications is far behind Nvidia's." The Club's take: Nvidia stands to win in the short term and the long term thanks to its significant lead in networking and software, two factors that support the stock's premium multiple. On networking , Nvidia previously acquired Mellanox, which prior to the acquisition was a leading supplier of end-to-end Ethernet and InfiniBand smart interconnect solutions and services for servers and storage. On the software side, the analysts highlighted CUDA , the company's "parallel computing platform and programming model," which allows developers to customize, optimize and harness Nvidia's GPUs. Though AMD has its own GPU-oriented software, called "ROCm," the analysts said CUDA has the edge. We acknowledge the near-term headwind for AMD, but we are sticking with chipmaker because it's a long-term winner based on our view that data center demand, though pressured right now, is a secular growth opportunity — and that AMD will continue to gain share from Intel on this front. Apple What the analysts say: Morgan Stanley raised its price target to $220 from $190, citing the results of their survey that show market share gains, positive iPhone mix shift, and strong "ecosystem effect." In the analysts' view, Apple has an opportunity to grow its revenue by seven times in the U.S. over the next decade to about $40 billion, while adding 170 million new users. Selling phones into a market is only the first step in maximizing the lifetime value of a customer, with the real upside coming from the ecosystem adoption that follows as every move deeper into the ecosystem drives better services revenues while increasing "switching costs" (the cost to subsequently leave the Apple ecosystem). China represents about $75 billion of Apple's sales today. The analysts said that the population base of China and India are similar, supporting the view "India will be just as important to Apple's growth algorithm over the next 5+ years as China was in the last 5 years," a view the analysts believe to be underappreciated at the moment. The Club's take: This is a very welcome update given the continuous updates about how China's Covid recovery appears to be stalling out. Though we expect China to come back online eventually, the idea that there is another market of similar size and it remains largely untapped is highly encouraging from a longer-term perspective and should serve to keep investors interested in the name. Separately, though the opportunity is likely a niche one at the moment, we do believe the new Vision Pro mixed reality headset has the potential to become the next major computing platform. Though it may be easy to write it off right now given its size — we get it, we're not exchanging our iPhone for bulky goggles yet — it's important to remember that the current iteration isn't meant for use on the go. Also consider that two of today's most popular computing platforms, the personal computer and cell phone, also started off as incredibly bulky, with little developer support. The company's strong ecosystem, loyal customer base and incredibly strong financial position keep us of the mind that Apple should be owned for the long haul, not traded — a designation only given to one other stock by Jim Cramer: Nvidia. Microsoft What the analysts say: Analysts at Mizuho reiterated their buy rating on Microsoft while taking up their price target to $390 from $360. While their Azure checks were "mixed," they were better than broader public cloud sentiment for the third quarter in a row, and believe that some upside to management's guidance is likely. Currently, the analysts are modeling Azure growth of 26% in constant currency, but believe the company will likely exceed this forecast. Adding to their optimism is of course the longer-term opportunity to leverage and monetize generative AI, commenting that they "see significant monetization opportunities." The Club's take: The idea that Azure checks are tracking better than the industry is encouraging. We already know that cloud consumption is under pressure as a result of clients optimizing their spending and usage on cloud platforms. That said, the Street is of the view that this trend will soon reverse as optimization efforts max out and clients seek a return to growth (after all, you can only optimize a budget for so long). However, if Microsoft is already tracking better than others then it stands to reason that as budgets expand, Microsoft is in pole position to benefit heading into 2024. Of course, the other positive that won't have any impact on the reported results is that Microsoft appears to be on the verge of getting all the approvals needed to finalize its acquisition of Activision Blizzard . Though our investment thesis isn't predicated on a successful acquisition of the video game maker, we do think it's positive as Activision's robust content library can help further build out and increase the attractiveness of Microsoft's gaming service Xbox Game Pass. Wall Street loves recurring revenue subscription businesses. Meta Platforms What the analysts say: Analysts at JMP Securities raised their target on shares of META to $350 from $300 ahead of next week's earnings release, citing "strong engagement trends, improving ad performance driven by AI," and what appears to be stabilization in the advertising market. Moreover, the analysts note that Meta is in the early stages of benefiting from multiple product catalysts, including Reels, AI, and cost discipline. On Reels specifically, we want to remind members that it has been a monetization headwind more than anything lately as ads placed on short-video TikTok rival monetize at a lower rate than those placed elsewhere on Meta's family of apps. However, the analysts said an "improved recommendation algorithm" — thank you AI investments — is driving engagement. Longer-term engagement only matters to Wall Street if it can be monetized adequately. Reels monetization is expected to turn neutral (think no longer a headwind but in line with the rest of the platform) by the end of the year. As for ads, the company's "Advantage+" platform is seeing increased adoption and helping with both ad targeting and attribution. The Club's take: Reels monetization improving near term along with engagement tracking positively is hugely positive for the stock as these two factors were major concerns for investors when the stock was selling off sharply in 2022. Though shares have been on an absolute tear all year, they remain one of the cheapest of the mega-cap names on 2024 numbers at just under 21 times consensus 2024 earnings estimates. The valuation along with the improving fundamentals keeps us in the name, though the monstrous year-to-date move keeps us at a 2 rating into the print. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) 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Nvidia chief Jensen Huang (centre L) poses for photographs before attending a press conference at Computex 2023 in Taipei on May 30, 2023.

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