Tech earnings: Amazon was the loser, Microsoft had ‘the best report,’ analyst says

Synovus Trust Senior Portfolio Manager Daniel Morgan joins Yahoo Finance Live to discuss FAANG stocks, the biggest winners and losers from this week's tech earnings, and the outlook for Apple and Nvidia earnings next week.

Video Transcript

- Well, it has as we've been talking about a while. It's been a wild ride in tech this week on the heels of all these big earnings reports that we've been discussing. The sector closing out up 1.1% today, and which we talked about the NASDAQ's the winner on the week as well.

Let's bring in Dan Morgan, Synovus trust senior portfolio manager. Dan, it's good to see here as we look back at this week, that we have seen in tech. What sort of your big picture zoom out view, especially considering that, you know, sentiment going into this quarter I think for tech was pretty lousy?

DANIEL MORGAN: Yeah, you're right. We had a very low bar coming into this quarter. And, you know, one of the big themes that we get pull away is obviously restructuring. We know that Meta and Alphabet talked about the huge restructuring plans that they're going through. They outlined kind of those costs and so forth.

And as you were talking about before in terms of the internet ad spend rates, obviously they are pretty flat. I mean, Meta was up 4%. You mentioned Amazon had what a 23% growth in ad spend rate, which is good. But overall, Google was flat. And Facebook and Google are kind of the two big players in that space. So those were some of my takeaways.

And then finally the cloud. The cloud was such a big theme through these reports. And, you know, obviously a huge deceleration in growth. I mean, look at AWS coming in at 16% for Amazon. In the fourth quarter of '21, they did 40%. But it's still alive.

And I don't think it's a secular change in the group. I just think it's a general slowdown. But those are kind of my takeaways from this very busy reporting week in terms of the FAANG stocks.

- Yeah, it's definitely been very busy in the tech sector. So Amazon was initially higher on the company's earnings call. It popped a little bit, then it fell after the call. So tell us what was your takeaway on what was the trouble spot that you saw for Amazon.

DANIEL MORGAN: You know, the biggest issue for Amazon, a lot of people don't realize this, but AWS generates about 16% of sales. But in this quarter, for example, and this has happened over and over again. They generated over $5 billion in operating profit. It was about $5.1, $5.2 billion in operating profit.

Amazon's core business, which is their North American International Group. Their national group lost 1.2 billion and the North America group made a little over 800 and 900 million. If you wash that all out, the overall company operating income was $4.7 billion, $4.8 billion.

So people don't realize how dependent Amazon is on AWS to generate positive operating income profit growth, and to offset the other parts of their core businesses. And yet they only have a very small portion of sales.

So I'm a little bit concerned, guys, going forward that the guidance that we got in regards to AWS, not really looking good. How is that going to affect Amazon as a bigger parent company going forward as we kind of close out 2023 until we get a rebound in cloud.

JULIE HYMAN: Yeah, well, some of that concern was definitely reflected in the shares today, right, and in reaction there, as people are concerned about that going forward. So if you look at the week and the big ones we got, you just talked about Amazon and your concern there. We got Meta. We got Microsoft.

We got Alphabet. Would Amazon be your loser of the week? And if so, who would be your winner of the week?

DANIEL MORGAN: Yeah, I think Amazon would have to be the loser. The stock was basically flat to slightly down. I think of all the reports we saw this week, Microsoft seemed to have the best report. Their commercial cloud unit beat estimates. It was up 22%.

Even though Azure came up short, they were 27% growth. The Street was looking for 30% to 31%. Intelligent Cloud was up 16%, 17%, so their core cloud business seems very strong. And Moore personal computing was only down 9%. The Street was looking for that to drop 15%, which is their PC unit group, which reflects on what you were talking before about Intel really struggling in the CPU area.

So I think across the board, Microsoft had a very good report. The stock was up about 8% to 9% for the week. It was, to me, the most consistent in terms of growth, where Meta, for example, relied heavily on restructuring to really drive their stock. Year to date, I think it's doubled.

And Alphabet was really kind of flat across the board, in terms of their overall business, and it was more of a restructuring story. So Microsoft seemed to me like they were still growing on all their matrix. They just weren't growing as strong as they did, let's say, five quarters ago.

- All right, Daniel, let's talk about one theme. AI was a big theme across the earnings calls. The Transcript on Twitter counted up all the mentions of AI on these calls, Meta with 44 mentions, Alphabet with 55, and Microsoft with 47 mentions. So talk to us about what your takeaway is on AI and where it factors in with these companies.

DANIEL MORGAN: Well, the best thing you can do as a CEO to jump start your stock is talk about AI, correct? I think right now-- and this sounds kind of redundant-- but I believe Microsoft kind of has a leg up in that space. We know that when Alphabet came out in February with their Bard, which is their competing chat bot, it was not really that well-received.

You look at a company like Apple that's going to report next Thursday. A lot of their stuff is focused on the phone. So each one kind of has their own initiatives.

Meta was one of the first ones to get into AI, and they have a lot of papers that they've had published on it. But they have kind of looked on as kind of falling behind some of these other players. But they're all talking about it. They're all jumping up.

My biggest concern is how can AI trickle down and actually affect the bottom line and grow profits into the future. Or is it just going to create more efficiencies and productivity within the existing products? So that's my biggest question, guys, is, OK, you've got an AI product.

How are you going to make money on it? How is it going to help out going forward? So that's what we have to wait and see. But right now, it's a great buzz word to jump your stock price up.

JULIE HYMAN: Yeah, I mean, it feels like it's very early to try and get an answer to that question that you have, to your point. I want to quickly look ahead to next week because we're going to be getting Apple. We're getting Nvidia soon as well. Those are two companies, especially Nvidia, I think is already benefiting from some of this demand for AI. I'm just curious how you think those are going to stack up.

DANIEL MORGAN: I'm optimistic about Apple. I know the consensus right now is looking for iPhone revenues to be slightly down about 3.5%, and I have a feeling they may come and beat that. So I'm optimistic about that. If you look at their service revenue, that's kind of what everyone's going to be focusing on this quarter because they have almost, what, two billion people using their products.

I think it's 1.6, 1.7 billion are using their phones. So how do you harvest that? How do you monetize that? You do it through their service growth.

And you're right. Nvidia is going to be coming down about two weeks down the pipe. And you know they're going to be hyping up their AI presence because that's what they're huge on, in terms of using those GPU chips. So I would expect hopefully a good quarter out of them. And they're about one quarter away from showing positive year-over-year growth, as they've kind of gone through this trajectory. So looking for good numbers out of Apple and Nvidia so good, positive momentum after a great week of FAANG stocks.

- Dan Morgan, thank you for both the look back on the week behind and the look forward to the week ahead.