Some buzzy AI names highlight this week's earnings slate - along with Costco

By Emily Bary and Tomi Kilgore

Dell and Marvell will offer glimpses into AI spending, while Costco and Gap are among big retail names due to report

Corporate executives are still talking up artificial intelligence at an increasing rate.

And it's not just the usual suspects. Between March 15 and May 23, nearly 40% of S&P 500 index SPX components brought up AI on their respective earnings calls with analysts, according to FactSet. First quarter earnings season isn't even over yet, but that count of 199 S&P 500 members already beats the prior record of 180 seen in the second quarter of 2023.

As would be expected, large technology companies were the heaviest hitters. AI came up 95 times on Meta Platforms Inc.'s (META) call, 86 times on Nvidia Corp.'s (NVDA) call, and 74 times on Microsoft Corp.'s (MSFT) call, according to FactSet's transcript analysis.

Investors are about to hear much more about AI in the week ahead, notably within the hardware sector. Marvell Technology Inc. (MRVL) and Dell Technologies Inc. (DELL) both report results Thursday as highly watched plays on the AI trend.

For Marvell, key questions include how the company can grow its AI business, and how that can make up for pressures in more traditional areas. And expectations are high for Dell as Wall Street looks to see the magnitude of its momentum in AI servers.

Read: Dell's stock is having a milestone day. Here's why Morgan Stanley is so bullish.

"We think Dell is well positioned to exceed Street estimates, with traction in the all-important AI flywheel continuing to gain steam," Evercore ISI analyst Amit Daryanani wrote in a recent note to clients, as he opened a tactical outperform call on the stock.

He added that "incremental wins with CoreWeave and Tesla could provide sizable upside to the AI server backlog buy-side bogey." That's perhaps $3.5 billion, he said.

Software companies will offer glimpses as well into how AI is impacting their financials. Look to Salesforce Inc. (CRM), Okta Inc. (OKTA) and Zscaler Inc. (ZS) for some of the most notable reads.

These companies will be looking to join the gaggle of others that have beaten earnings estimates so far this year. According to FactSet, 78% of the S&P 500's components have surprised to the upside on earnings per share, while 61% have beaten on the top line.

The week ahead is fairly light on index components, however. Just nine S&P 500 members are scheduled to report in the week ahead, according to FactSet, along with one member of the Dow Jones Industrial Average DJIA, which is Salesforce.

The week ahead in earnings

This is a big week for companies that report off-cycle results, meaning those that don't match up with traditional calendar quarters.

Retailers are some of the biggest names to watch, and Dollar General Corp.'s (DG) Thursday morning report could offer an especially interesting read on the state of the consumer. Dollar General said back in March that shoppers were making "tradeoffs in the store" as inflation pinched their budgets. The company also gave a disappointing profit forecast, with management mentioning expectations for a heightened discounting landscape. But UBS analyst Michael Lasser is upbeat heading into this quarter's report: "Most likely, the company will show it has made further progress in stabilizing top line trends, sharpening operations, and managing its [profit-and-loss] statement."

Elsewhere, investors should pay attention to what's happening in the cybersecurity market, in light of reports from Palo Alto Networks Inc. (PANW), Fortinet Inc. (FTNT) and Cloudflare Inc. (NET) earlier in the cycle that were met with negative stock reactions.

But soon-to-report Okta, for its part, has maintained that it's more than just a cybersecurity company since there are various reasons why companies pay for its identity-management tools. Zscaler is another player to keep an eye on, having beaten sales expectations in each of the last 20 quarters. Guggenheim analyst John DiFucci said he expects another revenue beat this time around, "but there may be little room to guide [fiscal fourth-quarter] revenue above the Street and still beat by a typical margin."

The call to put on your calendar

At a time when consumers have had to cut spending on stuff they want so they can afford what they need, Costco Wholesale Corp.'s (COST) fiscal third-quarter earnings report, slated for after the May 30 close, could be a bright beacon for investors. Costco's warehouses may seem to have everything, even gold bars, but most of what the membership-based retail giant sells is food, or what what people need.

In the previous quarter, Costco booked $31.67 billion, or 55% of total revenue, from its foods and sundries and fresh foods business. So with Costco's stock rising into record territory, investors shouldn't worry too much about what Costco says about its non-foods business.

When Walmart Inc. (WMT), which like Costco gets most of its sales from grocery items, reported on results in mid-May, it said consumers were spending less on non-food item, leading to deflation in the general merchandise category, but the stock still rallied to new records. So for Costco, investors should take note of what is said, like last quarter, about how its "significant value propositions" boosted sales.

The number to watch

Gap Inc. (GPS), the apparel retailer that sells a lot of stuff strapped consumers don't need, has surprised Wall Street the past two quarters by reporting same-store sales that didn't decline - they were flat last quarter and rose 2% the previous quarter - as strength in the lower-priced store brands of Old Navy and Gap offset weakness in higher-priced brands of Banana Republic and Athleta. For the fiscal first-quarter, Wall Street is now calling for same-store sales to tick higher, with the FactSet consensus projecting a rise of 1.2%. That's the first time the FactSet consensus has been positive heading into earnings in nine quarters. Whether Gap can pull off another upside surprise will likely come down to how much Banana Republic and Athleta sales can improve.

Keep in mind that although Target Corp. (TGT) reported on May 22 fiscal first-quarter profit that missed expectations, given weakness in sales of discretionary items, the retailer said it so "meaningful improvement" in some discretionary categories, most notably in apparel.

-Emily Bary -Tomi Kilgore

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05-26-24 1001ET

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