The big tech names have outperformed expectations this year, and that momentum has continued in the latest earnings season. Vitali Mossounov, Global Technology Analyst at TD Asset Management, discusses the latest results for the sector and the growing role being played by AI.
Transcript
Greg Bonnell: The big tech names have outperformed so far this year. But will that market leadership continue amid worries about slowing economic growth? Joining us now to discuss, Vitali Mossounov, Global Technology Analyst with TD Asset Management. Vitali, welcome back to the show.
Vitali Mossounov: Great to be back. Lots to talk about, Greg.
Greg Bonnell: Let’s talk about tech. Because of course, it had a very strong start to the year. Take a look at the NASDAQ. I put it up against the S&P 500, of course, tech-heavy. It has outperformed. And we just came through an earnings season. So we put all that together. The big question is, where are we headed? What did you see in those earnings?
Vitali Mossounov: I think it’s pretty simple. What these companies could control, they did really well. And things that were out of their control, well, sometimes good fortune smiles upon you. And I find in life, when you control things well, you put a little elbow grease in, and fortune is on your side, things tend to work out pretty well. And that’s the story of earnings.
Greg Bonnell: All right. So let’s break it into the three pillars. We’re going to start with revenue. This was the concern heading into these earnings, right, with a slowing economy and all these concerns about a recession that they would see their sales slow. How did that look?
Vitali Mossounov: The sales kept slowing. But it’s always about expectations, and expectations were about worse, worse sales. They didn’t slow as much as feared. And again, in the short term, that’s what matters. In the long term, it’s valuations. It’s fundamentals. In the short term, it’s expectations.
So throw some numbers out at you. Apple (AAPL) sales, well, they shrunk 3%– not good. Earnings flat. Alphabet (GOOG, GOOGL), sales grew 3%– not great. Not typical big tech sales, but good enough, we’ll call it good enough. And so I think as they especially talked about the next quarter, investors listened and said, you know, this might be the bottom. And if this is the bottom, well, that’s pretty good. It’s first in, first out. The first to see pain last year, and maybe they’re the first out, so we won’t worry about them. We’ll worry about an industrial stock or a consumer stock. So revenue, not bad.
Greg Bonnell: OK. So not bad, that’s the part where maybe they got smiled on a bit because they can’t control that side of it. Consumers wanting–
Vitali Mossounov: That recession never arrived. Or maybe it did and it’s here. We don’t know. But–
Greg Bonnell: We’ll find out after the fact, right?
Vitali Mossounov: We’ll find, yeah. We’ll find out.
Greg Bonnell: But what they, as you point out, what they can control are their own costs. And of course, costs skyrocketed during the pandemic because they thought the good times were here, and they were never going to leave. And they found some discipline– or have they found the discipline that the market’s looking for?
Vitali Mossounov: Yeah, I think they have. And I think the market may have forced that discipline on them with what they did to their stock prices last year. But there was a lot of discipline. Pick on Microsoft (MSFT) here, who was able to get their expense growth down into the low-single digit range and guiding for 2% growth next quarter in terms of expenses. But really, that’s the theme across the board. Companies like Apple, like Microsoft, like Facebook (META) coming in below even what they expected a quarter ago.
Cutting costs, obviously, cutting their workforce, we’ve heard a lot of that. Freezing pay– Microsoft just last week talking about a full-time salary freeze. That’s another one. And doing what they can, spending less on the cloud, for example. So costs, what they can control, they’re doing remarkably well.
Greg Bonnell: Well, you’d be hard-pressed, I think, to find any tech company this quarter that didn’t throw the phrase AI out there. Some for good reason, obviously. Microsoft, the Googles competing head-to-head on the AI front. But every release mentioned artificial intelligence. What did you see there, and what do we need to be mindful of?
Vitali Mossounov: It was the most predicted question you could imagine. And it wasn’t just tech companies. I think most companies got the question.
Look, what we saw were a lot of generic responses. And I won’t sugarcoat it. Companies were prepared for this question. And they got the question and they answered. They said, we’ve been making these investments for many years. We will have the products out shortly. We’ve got the product roadmap, and there’s a path to how we can monetize AI.
Some companies did a better job. By better, I mean being more detailed and descriptive. Microsoft, I would certainly put in that camp. And they needed to. So much of their future strategy is about AI, the leadership they have with their ownership, part ownership of OpenAI.
Other companies, they didn’t give you as much, maybe, as you wanted. Apple is in that camp. But that’s typical Apple. Apple likes to say that we create wonderful, delightful products, and when we launch them, you’ll find out just how wonderful they are. And they have a good track record of doing that. So AI for them was a very vague answer. But again, that’s typical Apple.
Overall, lots of answers about AI. But the real answers are going to come with time, when we see the actual products. Right now, it’s mostly fluff.
Greg Bonnell: And you’d expect to hear it from the tech companies. You said even outside of tech, how are other companies sort of getting into the whole AI thing?
Vitali Mossounov: Companies across the board are getting asked these questions. And they’re either being asked, is this a big threat for you? For example, there are some IT services firms, but even areas like finance and accounting outsourcing, there is a big company in the US on the New York Stock Exchange, they were asked, hold on a second, you’re outsourcing– big companies are outsourcing all this work to you, but that work can be very repetitive, very mundane, the debits and credits, maintaining the general ledgers. Isn’t this something that can be eliminated? And isn’t that a big threat to you? And you’ve seen stocks react in a big way to this.
But this goes further than that. This goes to medical device companies that one day now have the potential to go from just being incredible but effectively dumb device makers to harnessing the power and the understanding of the human body and the condition it’s operating in, the mind, the emotions, and using that data and the companies then monetizing that data.
Bottom line, investors are trying to find out for any business model in any sector where are the threats and what are the opportunities.
Greg Bonnell: There’s a certain newness to it, although people who have worked in AI would say they’ve been working on this forever. But I think for the general public, there’s a certain newness to it in the developments recently. And around that, there are some concerns. I mean, we’ve got tech industry heavyweights who are concerned about how it could change our lives. And of course, then you have workers who are concerned about how it could change their lives, probably front and center before you talk about some of the other things. What about my job?
Vitali Mossounov: Yes. And I think it’s perhaps not getting enough attention. It will be a few years for this to play out. But I’m certainly in the camp that AI is going to bring a productivity boost, especially to the knowledge economy, and we’ll see that play out over the near term and the medium term. That’s low-hanging fruit. But in the medium to long term, and I’m talking three, four, five years, this is the first technology that really has the potential to replace human workers.
AI, the essence of the tools we’re going to build with it, are automation tools. And these automation tools, the companies that are building them will be trying very much to have them automate tasks done by, well, human beings. And even if they’re only partially successful, this will have the effect of suppressing wages. So, mid to long term, be very cautious of this.
And we’ve already seen management teams point to this. The CEO of IBM (IBM) a couple of weeks ago on the record saying that he’s looking to automate as much as 30% of his back office and functions like HR. It’s all talk right now. Again, we don’t want to get ahead of ourselves. But time will tell.
Greg Bonnell: I guess the spin that might get put on it by corporations will be that, yeah, we’ll take away the drudgery work. Because you don’t want to– human beings don’t want to do these mundane tasks anyway. But if your job is mundane tasks, and they’re not there anymore, and there’s not another position for you, I can sort of see some of the anxiety that might grow out of it.
Vitali Mossounov: Yeah. Every job has mundane tasks. But in general, that’s good language and good spin. But most of us aren’t building or designing the Sistine Chapel. Jobs are jobs, and people strive to do them well. Companies are going to try to unlock ways to save money. It is the capitalist imperative. And the language will need to be careful. And that’s very careful language. But at the end of the day, you’ll see hints of their true intentions.
And I think Microsoft dropped that hint. They said, look, we are going to have a full-time salary freeze. And for the record, it wasn’t quite a public release, but these things get leaked and so on and so forth. But they said, look, we’re going to have a full-time salary freeze, but we’re going to use the money that we save to invest into AI initiatives. So you’re actually telling the workers that we’re not going to pay you more, but we’re going to take that money and fund something that could replace you, yeah, or eliminate the drudgery, as they would perhaps say.
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