Q1 Earnings: Can Artificial Intelligence (AI) Sustain Momentum? – May 26, 2023

Q1 Earnings: Can Artificial Intelligence (AI) Sustain Momentum? – May 26, 2023

The analysts covering Nvidia ( NVDA – Free Report ) are struggling to come up with superlatives to describe the chip maker’s stellar quarterly results. In Nvidia’s May 26 quarterly numbers, many analysts saw some upside to consensus estimates, given the company’s AI leverage. But the stock has already doubled this year ahead of the Wednesday release on that AI hope.

It’s humbling to admit that I thought the stock was ‘priced for perfection’ and was skeptical that Nvidia could do anything in the quarterly numbers that could live up to those lofty expectations. Keep in mind that we fall into the Nvidia ‘fan club’, having held the stock in the Zacks Focus List portfolio since May 2019.

The stock’s performance since the quarterly release has been in a class of its own, and for good reason. In the current uncertain macroeconomic environment, Nvidia raised Q2 revenue guidance by more than +50% based on robust data center demand reflecting momentum in generative AI and large language models. Importantly, Nvidia has indicated a high degree of visibility into these demand trends in the coming quarters.

There are legitimate questions about how sustainable this growth trajectory will prove to be and whether Nvidia will be able to protect its first-mover advantage as the competitive landscape heats up over time.

We’ve all seen the potential of generative AI by playing around with ChatGPT and Google Bard, allowing us to envision this technology’s ability to improve efficiency. But it’s reasonable to be skeptical of both the trillions of dollars in TAMs that will spark the AI ​​revolution or the emerging talk of an ‘AI bubble’.

Nvidia is hardly alone in riding the AI ​​wave, with Microsoft ( MSFT – Free Report ) and Alphabet ( GOOGL – Free Report ) already leading the way. Alphabet’s earlier AI efforts haven’t impressed the market much, and many have come to think that Microsoft might use AI to open up Alphabet’s hold on the search market. But Alphabet seems to be finding its mojo back, as the stock’s recent performance shows.

The chart below shows the year-to-date performance of Microsoft, Alphabet and Nvidia.

The earnings outlook for the ‘Big 5 Tech Players’ that include Apple ( AAPL – Free Report ) , Amazon ( AMZN – Free Report ) and Meta ( META – Free Report ) in addition to Microsoft and Alphabet have steadily improved recently. Total Q1 earnings for the group were essentially flat (down -0.4%) on +4.3% higher revenue.

The growth outlook begins to improve from the current period (2023 Q2) onwards, with earnings expected to be +8.9% on +4.9% higher revenue.

The chart below shows the group’s earnings picture on a quarterly basis.

The chart below shows the group’s earnings picture on an annual basis.

K1 Earnings Season Scorecard

Including all quarterly reports out through Friday, May 26, we now have Q1 earnings from 486 S&P 500 members, or 97.2% of the index’s total membership. Total earnings for these companies are -3.7% lower than the same period last year on +4.5% higher revenue, with 78.2% beating EPS estimates and 75.1% beating revenue estimates.

The proportion of these companies beating both EPS and revenue estimates is 63.2%.

Regular readers of our earnings commentary know that we referred to the overall picture emerging from the Q1 earnings season as good enough; not great, but not bad either.

With this reporting cycle now largely behind us, we can say with confidence that corporate earnings are not headed for the ‘cliff’ that market bearers warned us about.

As we see it, the ‘better-than-feared’ view of the Q1 earnings season may be a little unfair at this stage, given how resilient corporate profitability has proven to be. But the view isn’t entirely beside the point either.

We have approximately 100 companies on deck to report results, including 9 S&P 500 members. This week’s docket features Salesforce.com, Macy’s, Broadcom, Lululemon, Dollar General, and others.

Below, we compare Q1 results so far to what we’ve seen from the same group of companies in other recent periods.

The first set of charts compares the earnings and revenue growth rates for the companies that reported with what we’ve seen in other recent quarters from the group.

The comparison charts below put the Q1 EPS and revenue beat percentages into historical context.

The Earnings Big picture

To get an idea of ​​what is currently expected, check out the chart below that shows current earnings and revenue growth expectations for the S&P 500 Index for 2023 Q1 and the next three quarters.

The chart below shows the earnings and revenue growth picture on a year-over-year basis.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Earnings Outlook Reflects Stability

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