Last week’s market losses aside, there are reasons for an upbeat outlook through the second half of this year. The good news centers around several factors, including the recent positive surprises in the earnings season and a boom in AI tech.
On the macro level, stocks are doing well. After last year’s deep losses, the S&P 500 is up 17% year-to-date and the NASDAQ has gained almost 33%. The markets would seem to have plenty of slack to absorb an off day, at present.
Looking at earnings, we find that some 80% of the S&P-listed firms have reported. While overall earnings are down – by about 7%, marking the third straight quarter of declining profits – the ‘surprises’ have been mostly to the upside. Some 79% of reporting companies are beating expectations on earnings, a metric that indicates underlying strength.
And finally, we get to AI and tech. A narrow base of tech stocks are supporting the markets right now, and they in turn are finding support from investor enthusiasm over AI. Ever since OpenAI launched its ChatGPT chatbot last November, AI has been on every tech investor’s mind. The technology is in the early stages of release, but shows signs of becoming truly disruptive, in everything from online searching and advertising to IoT and autonomous vehicles. There’s good reason for investors to move toward AI.
So it’s logical, now, to look under the hood at a couple of tech leaders. Rosenblatt analyst Barton Crockett had done just that, digging deep into Amazon and Apple to gauge their attraction for investors. His conclusions are interesting, and worth a second look.
Amazon (AMZN)
First up is Amazon, the world leader in e-commerce and, with its $1.4 trillion market cap, the world’s fourth-largest publicly traded company. Amazon has been generating interest with its moves into generative AI – while the company is a relative latecomer to the AI bandwagon, it has the resources and tech savvy to make swift advances. In recent months, Amazon has unveiled an AI chatbot and image builder, Bedrock, as well as CodeWhisperer, an AI-driven software code development tool.
The company is also making a strong move into the hardware segment of AI, announcing its development and release of two new silicon semiconductor chips to rival the industry leader, Nvidia. Nvidia currently holds some 90% market share in the AI processing chip market, but that dominance opens up an opportunity for the competition. A competitor can shoulder its way in with a high-quality product at a significantly lower price point – just the route Amazon is trying to take with its Inferentia and Trainium chips.
Finally, Amazon gets plenty of investor attention for its ability to generate returns. The company, as noted, is one of the handful of $1 trillion-plus firms, and the shares are up some 63% year-to-date.
More importantly, Amazon’s shares spiked on Friday, on a weak day for the markets, on the back of an excellent 2Q23 earnings report. The top line showed total revenues of $134.4 billion, for an 11% gain year-over-year – and beating the forecast by just over $3 billion. At the bottom line, Amazon reported earnings per share of 65 cents, a figure that was 31 cents per share better than had been expected. Shares in Amazon spiked 8% after the earnings release.
Turning to analyst Crockett’s view, we find him upbeat on Amazon, seeing the company holding a strong position to benefit from consumer spending going forward and finding current support from its solid base of AI products.
Accordingly, Crockett bumped up his rating on Amazon from Neutral to Buy, and wrote of the stock, “Our past concerns — that consensus views were too optimistic — have abated. As the business resets, with efficiency a new focus for retail, and AI an emerging driver in cloud, the risk of impending economic headwinds looks less worrying, opening the door to higher multiple consumer growth stories.”
In addition to his upgraded Buy rating, Crockett increased the price target from $111 to $184, implying a one-year upside potential of 32%. (To watch Crockett’s track record, click here.)
The stock market’s giants have always attracted plenty of attention from the Wall Street analysts, and Amazon has 38 recent reviews on file – with a 37 to 1 breakdown of Buys over Holds, giving the stock a Strong Buy consensus rating. The shares are priced at $139.57, and their current $170.41 average price target suggests that they will gain 22% in the year ahead. (See Amazon’s stock forecast.)
Apple (AAPL)
Next up is Apple, the maker of the iconic iPhone, iPad, and MacBook lines. Apple has built long-term success on marketing lines of high-end tech products, but its thriving ecosystem also includes its highly successful Services segment that includes Apple Pay, Apple TV+, and Apple Music, amongst other offerings.
Apple is also making use of AI technology – and in-line with its history, the company is taking a creative approach to the field. Rather than try to build new AI systems, Apple this past June released a number of new software features that make use of AI to create a more seamless user experience. The company is integrating a AI-powered language model into the autocorrect feature of the iPhone line, so that the smartphone will learn how to correct its own user – by how that user types. Also, Apple is working AI into the AirPods; the Pro model of the popular earbuds will recognize when wearers are engaged in a conversation, and turn off the noise-canceling feature.
Finally, investors have long recognized that Apple is a long-term play, a consumer giant that has proven to be recession-resistant. In a recent example of the company’s resilience, wee can look at PC shipments during 2Q23. Overall, customers retrenched during the quarter, and shipments of PCs were down 13% y/y – but Apple’s MacBooks saw a 10% y/y quarterly gain in shipments.
While Apple continues its long-term trend of delivering return on investment, solid profits, and popular consumer products, the company’s stock fell 5% after its earnings release for fiscal 3Q23 due to concerns over hardware sales. While the iPhone gained market share, the device’s overall sales were still down y/y, from $40.67 billion to $39.67 billion.
All told, the company recorded its third straight quarter of dwindling sales, dialing in total revenues of $81.8 billion, slipping 1.4% y/y although the figure met Street expectations. Apple’s earnings figure, of $1.26 per diluted share, was 7 cents ahead of the forecasts but that wasn’t enough to stave off the bears.
Checking in again with Barton Crockett, we find the analyst is also somewhat pessimistic on Apple, at least for the near-term. Crockett has shifted his stance, noting that Apple’s long upward trend has put it at a peak valuation, and that it’s simply not possible to predict future successful products.
“After a mixed F3Q23 that highlights the slowdown phase in which Apple now sits, we downgrade the stock to NEUTRAL from BUY… Apple makes the most important device of the modern economy — the iPhone — has executed an impressive upgrade to Macs with the pivot to Apple Silicon, and is re-accelerating services. But a slowdown in the U.S. seems likely to last until a material new product category takes hold. And that is uncertain both in timing and success, leaving little reason to favor shares now trading near peak absolute and relative multiples,” Crockett says of the stock, in his recent note.
While the rating has been downgraded, Crockett’s price target for Apple, $198, indicates his belief in a 9% upside over the next 12 months.
Like Amazon, Apple has attracted plenty of Wall Street attention. The stock has 29 recent reviews, favoring Buys over Holds by 22 to 7 for a Strong Buy consensus rating. The shares have an average price target of $208.99, suggesting a 15% y/y gain from the current $181.99 trading price. (See Apple’s stock forecast.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
