Opinion: These three tech companies should be the brightest spots in a grim earnings season

The chip company’s business has exploded over the past year thanks to a rush of demand for its chips that power artificial-intelligence applications, including generative AI, in data centers. That could help translate into more than 400% adjusted earnings growth for the company’s January quarter. Wall Street will find out for sure at the end of this earnings cycle when Nvidia posts results in late February.

Meanwhile, Amazon is expected to see its GAAP earnings soar nearly 2500%, and Facebook parent Meta is projected to post a roughly 170% increase.

The sizable profit bumps expected from Nvidia, Amazon and Meta highlight a stark contrast between the technology sector and many other industries. Results from Nvidia, Amazon and Meta could be of most help to S&P 500 profits thanks to those companies’ sheer scale, but other tech companies are expected to see solid earnings increases as well, in large part due to cost-cutting measures enacted over the last year.

In contrast, sectors like automotive, which includes electric-vehicle maker Tesla Inc.
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and financial companies have seen demand for their products fall. In the case of automakers, higher interest rates make cars more unaffordable for consumers. In banking, high rates have curtailed fee-generating businesses like investment-banking deals and home buying, while banks are also now paying out higher interest rates on all deposits.

So far, the corporate-earnings season has started out on a sour note, said Christine Short, vice president of research at Wall Street Horizon — noting that higher interest rates were a big headwind and a double-edged sword in most of the recent bank earnings reports. And though sales at U.S. retailers were slightly better than expected in December, overall gross domestic product (GDP) is estimated to have slowed in the quarter.

In the current lackluster economy, Nvidia’s contribution is major, but it will not be alone — Amazon and Meta are also helping prop up earnings. These companies are projected to be the top-three positive contributors to year-over-year earnings growth for the S&P 500. Without these three tech giants, the S&P 500 overall is expected to see earnings fall 7% for the fourth quarter, according to John Butters, senior earnings analyst at FactSet.

The three companies have also contributed handily to the S&P 500’s surprisingly strong growth over the last year. Nvidia was the index’s best performer during 2023, with its shares soaring 238%. The chip maker has continued to ride the current AI wave with its graphics processors (GPUs) for data centers, and it has been dubbed “the arms dealer to a potentially massive artificial-intelligence surge,” by Bernstein Research analyst Stacy Rasgon. And Meta is nearing a trillion-dollar valuation for the first time in more than two years.

Nvidia’s growth will also help the overall information-technology (IT) sector, which is poised to see better earnings growth this quarter (15.5%) compared with the S&P 500’s expected decline. The IT sector, which doesn’t include consumer-discretionary companies like Amazon nor communications-services businesses like Facebook parent Meta, is projected to see only about 6% growth in revenue — but that’s still double what’s expected for the index as a whole.

While the S&P 500 index is expected to see better revenue growth than profit growth, that trend is expected to be the opposite within the IT sector — and at Nvidia. The company is currently able to price its GPUs for data centers at a premium, since it has very little competition right now and it has not been able to keep up with demand.

Even though Nvidia has had to redevelop some of its chips for the Chinese market due to a U.S. ban on sales of certain types of chips to China, analysts expect Nvidia will report revenue growth of 231%, according to FactSet. That growth would be higher than last quarter’s growth of 206%. Nvidia’s stunning earnings growth, though, is expected to decelerate from the fiscal third quarter’s adjusted earnings growth of 593%.

Both Amazon and Meta are also expected to see far faster-growing profits in the fourth quarter relative to their revenue growth. Both companies have, like many others in 2023, gone through cost-cutting. In Amazon’s case, the e-commerce giant has been focused on streamlining and improving its logistics services, moving to regional fulfillment networks from a national one. The shift is aimed at making delivery more predictable.

Amazon’s advertising business, a much higher-margin business, could provide an upside surprise for investors. That business could even see further upside as Amazon continues to beef it up. It will begin showing ads on Prime Video later this month, much to the dismay of consumers, unless they pay an additional $2.99 a month. Last week, Wedbush Securities analyst Scott Devitt raised earnings estimates for the e-commerce giant, saying that he believes its operating income will come in ahead of the company’s guidance due to fulfillment changes, 24% revenue growth in ads and disciplined spending on headcount.

“Recent workforce reductions signal continued cost discipline and reinforce commitment to margin expansion,” Devitt said, noting that the company’s recent smaller cuts at various business units, including Alexa, Twitch and MGM Studios, impacted about 1,300 jobs — significantly less than the roughly 27,000 job cuts across its retail business early in 2023.

Facebook parent company Meta made huge job cuts as well, dubbing 2023 as the “Year of Efficiency” after Wall Street made its qualms clear in 2022 — with many investors unloading the stock, unhappy with its overspending on its vision of the virtual digital world known as the metaverse, as well as its headcount. That frustration was vocalized best by one investor, Altimeter Capital Chief Executive Brad Gerstner, who wrote an open letter to CEO Mark Zuckerberg and the board in October 2022 criticizing the company’s strategies. “Meta has drifted into land of excess — too many people, too many ideas, too little urgency,” Gerstner wrote.

Since then, Meta initiated major layoffs, resulting in job cuts of over 21,000, and reduced some of its spending on the metaverse. While the company is back to posting revenue growth, some analysts forecast that growth is slowing. And even if Meta’s profits soar as expected, investors will also still be watching to see if operating losses narrow in its Reality Labs unit, where it has been spending billions on its metaverse vision. Last quarter, its virtual-reality headset, Quest 2, saw a decline in sales.

While Nvidia, Amazon and Meta aren’t expected to swing S&P 500 earnings into positive territory based on current projections, it’s feasible that the companies could achieve that feat if they post sizable beats. Investors will have to wait and find out.

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