The Magnificent Seven have gotten less magnificent ahead of earnings. This one could have the most explaining to do.

By Bill Peters

'The Street wants and needs answers next week on Tesla's 1Q conference call,' analyst says

The so-called Magnificent Seven - Apple Inc., Nvidia Corp., Microsoft Corp., Tesla Inc. Google parent Alphabet Inc., Amazon.com, Meta Platforms Inc., the parent of Facebook and Instagram - have done the heavy lifting for the U.S. stock market since last year's massive artificial intelligence stock-buying bender.

But last week, they lost a collective $950 billion in market value, the group's most ever for a single week, amid what one analyst referred to as "an unwind of the entire sector."

Now, four of those seven - Tesla, Microsoft (MSFT), Alphabet (GOOGL) and Meta (META) - will spend the week ahead making their case to investors and Wall Street analysts.

The company with the most answering to do will likely be electric-vehicle maker Tesla (TSLA), which reports quarterly results on Tuesday. Those results will follow reports that it planned to cut more than 10% of its staff, following deeper anxieties about profits, steeper competition and weaker EV demand.

Tesla has cut prices to attract customers, amid concerns that electric vehicles have been too expensive, but first-quarter deliveries of Tesla's electric vehicles fell short of Wall Street's modest expectations. Early EV adopters may have already done their adopting, and other analysts have worried that the charging infrastructure needed to support EVs on the road isn't there yet.

"The Street wants and needs answers next week on Tesla's 1Q conference call next Tuesday, April 23rd after the bell as the string of bad news over the last few months has been a horror show for investors in the Tesla story," Wedbush analyst Dan Ives said in a research note last week.

"We need to hear the rationale for the cost cutting, the strategy going forward, product roadmap, and an overall vision from Musk otherwise many investors might head for the elevators during this Category 5 perfect storm of weak demand Tesla is seeing globally in 2024."

Meanwhile, Meta reports on Wednesday. Microsoft and Alphabet report on Thursday.

Analysts are still parsing out who can ultimately do more with AI longer-term, and where else they can use it to drive profit, but they still largely expect hefty sales and profit gains. And Wedbush analysts, in a note this month, also pointed to signs of better trends recently in the online ad space, benefiting both Google and Facebook.

However, some of them say that the full benefits of the massive push in AI could take longer to pay off than advertised. And concerns have grown about an AI bubble and worries elsewhere that AI risks spamming up the internet and making it worse for users.

Alphabet will be coming off a fourth quarter in which a bounce-back in its digital ads business, following a broader pullback in ad spending amid caution about the economy, came up shy of Wall Street's expectations. Synovus Senior Portfolio Manager Daniel Morgan said that for Alphabet, investors will be focused on Gemini, Alphabet's chatbot replacement for the poorly-received Bard, and how it fits in with Google's broader search ecosystem as well as with Apple, which is reportedly considering using it in the iPhone.

Other questions, he said, involved competition with Meta over online searches and advertising, the state of YouTube amid competition with TikTok, and the state of Google's cloud services segment amid competition with Amazon and Microsoft.

Microsoft, meanwhile, will likely churn out another quarter of growth, as workplaces continue to use its cloud services and begin trying out Copilot, its AI assistant, BofA analysts Brad Sills said in a research note last week. Shares of Meta, meanwhile, rocketed higher in February after it declared its first-ever dividend.

"We remain positive on Meta and reiterate our thesis that Reels, Messaging, and AI driven ad improvements are still early, and could lead to positive product surprises & revenue momentum in 2024," BofA analysts said in a note on Friday.

FactSet Senior Earnings Analyst John Butters, in a report on Friday, said that five of the seven Magnificent Seven companies - Nvidia, Amazon, Meta, Alphabet and Microsoft - were expected to be the biggest contributors to first-quarter profit growth in the S&P 500 Index SPX overall.

"In aggregate, these five 'Magnificent 7' companies are expected to report year-over-year earnings growth of 64.3% for the first quarter," he said.

"Excluding these five companies, the blended (combines actual and estimated results) earnings decline for the remaining 495 companies in the S&P 500 would be -6.0% for Q1 2024," he added.

This week in earnings

For the week ahead, 158 S&P 500 companies, including 11 on the Dow, will report quarterly results, according to FactSet.

Aside from the Magnificent Seven, we'll also get earnings from Intel Corp. (INTC) and IBM (IBM). Results are also due from automakers Ford Motor Co. (F) and General Motors Co. (GM). Results from Visa Inc. (V) will add more detail to the state of the consumer, as higher prices heighten concerns about spending habits and late payments.

Elsewhere, Mattel Inc. (MAT) and Hasbro Inc. (HAS) will also report, as toy demand remains lukewarm and analysts grow more concerned that gains from Dungeons & Dragons and Magic: The Gathering - a bright spot for Hasbro - might be topping out. Audio streaming service Spotify Technology (SPOT) also reports during the week.

The calls to put on your calendar

Airlines and Boeing: Boeing Co. reports results on Wednesday, amid ongoing turmoil over the jet maker's safety standards that has kept dozens of its 737 Max 9 jets out of the skies and prompted the government to limit production of its Max jets. The company's earnings call could lend more detail on the financial fallout.

So could the results from American Airlines Group Inc. and Southwest Airlines Co. on Thursday. Reports from those two carriers will arrive after Scott Kirby, the chief executive of United Airlines Holdings Inc., said last month that Boeing's problems were a "two-decade issue," and that the groundings of the Max 9 jets had cost it $200 million - and what would have been a profitable first quarter.

The number to watch

UPS sales, shipping volumes: United Parcel Service Inc.'s quarterly results, due Tuesday, will be a proxy for shipping demand, and in turn the broader purchasing patterns of consumers and businesses.

Analysts aren't expecting much of an improvement, after two years of inflation-induced belt-tightening. But after FedEx last year bragged that won business from UPS (UPS) - amid UPS' drawn-out negotiations with its Teamsters union - UPS this month scored something of a win against its archrival.

On April 1, UPS said it won a "significant" air cargo contract with the U.S. Postal Service, and would eventually become the USPS' primary air cargo provider. The victory for UPS came at the expense of archrival FedEx Corp. (FDX), which in a filing that same day said that its agreement to provide transportation services for the USPS would end by Sept. 29 after talks to extend the pact caved. UPS will likely provide more detail about the deal - as well as shipping trends for the rest of the year.

-Bill Peters

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04-22-24 1025ET

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