Magnificent 7 Stocks Earnings Updates: AI Remains the Focus

As the stocks known as the “Magnificent Seven” report their first-quarter earnings, the spotlight remains largely on artificial intelligence.

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 the firm managed to generate excitement despite falling profits. Microsoft MSFT and Alphabet’s GOOGL/GOOG AI progress was rewarded with big jumps in their share prices.

Meanwhile, Meta’s META price fell on wariness around when its major capital spend on AI will turn into meaningful profit, even with double-digit revenue growth. At Amazon AMZN, gains in profitability were paired with strong opportunities to benefit from AI. For Apple AAPL, the story looks like a weak 2024, but with some improvement coming in 2025. Nvidia NVDA will close out the reporting for the Magnificent Seven on May 22.

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

Alphabet: Dividend Surprise, Fair Value Hiked

• Fair Value Estimate: $179.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Uncertainty: High

Alphabet 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 authorized 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 by 14%, YouTube advertising surged by 21%, and the cloud business also delivered impressive growth, with revenue up 28%, the best result in over a year.

Read Michael Hodel’s full take.

Amazon: AWS Growth Accelerates and Profit Margins Improve

• Fair Value Estimate: $193.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Uncertainty: High

We are raising our fair value estimate for wide-moat Amazon to $193 per share from $185 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 center investments in 2024 to meet generative AI demand. Many positive trends from the last several quarters continued with notable improvement in AWS demand and additional cost savings arising from fulfillment 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 favorably 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 segments 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.

We believe Amazon is well-positioned in generative AI and should benefit as the technology adoption gains steam. Management believes generative AI can add tens of billions of dollars to revenue over the next several years and announced various new AI-related solutions and services, including Q, a generative AI-powered assistant for software development. On AWS overall, we think the migration to the public cloud is an enormous opportunity and remains in the early stages of evolution, with AWS being the clear leader. Based on strong AI demand, Amazon plans to step up capital investments in data center capacity in 2024, with capital expenditures in the quarter of $14.9 billion expected to be the low point for the year, which is generally consistent with what we were anticipating.

Read more from Dan Romanoff.

Apple Earnings: A Weak 2024, but Optimism for 2025

• Fair Value Estimate: $170.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

We raise our fair value estimate for wide-moat Apple AAPL 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.

We’ve raised our forecast for iPhone revenue in fiscal 2025, as we expect Apple to build some generative AI functionality into the iPhone 16, likely releasing in late September, with peak revenue from the device in the December quarter. We believe Apple will make an announcement surrounding generative AI at its developer conference in June, where it typically announces its new iOS software for the iPhone. After what we expect to be two straight years of lower iPhone revenue in fiscal 2023 and 2024, we believe a stronger refresh cycle can occur in fiscal 2025 with more exciting new features underpinned by AI. We surmise that the initial features to benefit from generative AI would be Apple’s Siri voice assistant, messages, and Safari browser.

Read more from William Kerwin.

Meta Platforms: Increased Spending, AI in Focus

• Fair Value Estimate: $400.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Uncertainty: High

Meta Platforms 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 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.

Microsoft: Earnings Beat, Fair Value Hiked

• Fair Value Estimate: $435.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Uncertainty: Medium

Microsoft 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, 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 by 12%, intelligent cloud increased by 21%, and more personal computing expanded by 17%. AI remains the focal point and contributed 700 basis points to Azure’s growth. Management also provided a high-level preview for fiscal 2025 which included double-digit revenue growth and operating margin contraction of about 1 percentage point, consistent with our model.

Read Dan Romanoff’s full take.

Tesla: Cheaper Cars, Fair Value Hiked

• Fair Value Estimate: $200.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Fair Value Uncertainty: Very High

Morningstar analyst Seth Goldstein had four takeaways from Tesla’s 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.