wildpixel
The big tech names have exceeded expectations this year, and that momentum has continued into the latest earnings season. Vitali Mossounov, Global Technology Analyst at TD Asset Management, discusses the latest results for the sector and the growing role played by AI.
Transcription
Greg Bonnell: The big tech names have outperformed this year so far. But will that market leadership continue amid concerns about slowing economic growth? Now joining us to discuss, Vitali Mossounov, Global Technology Analyst with TD Asset Management. Vitali, welcome back to the show.
Vitaly 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. Check out the NASDAQ. I put it up against the S&P 500, obviously, tech-heavy. It has performed. And we just came through a winning season. So we set all that together. The big question is, where are we going? What did you see in those earnings?
Vitaly Mossounov: I think it’s quite simple. What these companies could control, they did really well. And things that were out of their control, well, sometimes luck smiles at you. And I find in life, when you manage things well, you put in a little elbow grease, and fortune is on your side, things tend to work out pretty well. And that is the story of earnings.
Greg Bonnell: All right. So let’s break it down into three pillars. We will start with revenue. This was the concern that focused on these revenues, right, with a slow economy and all these worries about a recession that they’re going to see their sales slow. What did that look like?
Vitaly Mossounov: Sales continued to slow. But it’s always about expectations, and expectations were about worse, worse sales. She didn’t slow down as much as feared. And again, in the short term, that’s what matters. In the long term, it is valuations. It is fundamental. In the short term it is expectations.
So throw some numbers at you. Apple (AAPL) sales, well, they shrank 3% – not good. Earnings flat. Alphabet (GOOG, GOOGL), sales grew 3% – not great. Not typically great technical sales, but good enough, we’ll call it good enough. And so I think when they talked about the next quarter in particular, investors listened and said, you know, this could be the bottom. And if this is the bottom, well, that’s pretty good. It’s first in, first out. The first to see last year’s pain, and maybe they are the first, so we will not worry. We will worry about an industrial stock or a consumer stock. So income, not bad.
Greg Bonnell: OK. So not bad, that’s the part where maybe they got a little smile because they can’t control that side of it. Consumers want –
Vitaly Mossounov: That recession never came. Or maybe it did and it’s here. We don’t know. But–
Greg Bonnell: We will find out after the fact, right?
Vitaly Mossounov: We will find, yes. We will find out.
Greg Bonnell: But what they, as you point out, what they can control are their own costs. And of course costs jumped during the pandemic because they thought the good times were here, and they were never going to go away. And they found some discipline – or have they found the discipline the market is looking for?
Vitaly Mossounov: Yes, I think they have. And I think the market forced that discipline on them with what they did to their stock prices last year. But there was a lot of discipline. Pick here on Microsoft (MSFT), which could bring its cost growth into the low-digit range and lead to 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) are below even what they expected a quarter ago.
Cutting costs, of course, cutting their staff, we’ve heard a lot about that. Freezing pay – Microsoft just last week talked about a complete freeze on salary. That’s another one. And do what they can, for example spend less on the cloud. So costs, what they can control, they do remarkably well.
Greg Bonnell: Well, you’d be hard-pressed, I think, to find any tech company this quarter that didn’t throw out the phrase AI. Some for good reason, of course. Microsoft, the Googles compete head-to-head on the AI front. But every release mentioned artificial intelligence. What did you see there, and what should we take into account?
Vitaly Mossounov: It was the most predictable question you could imagine. And it wasn’t just tech companies. I think most companies got the question.
See, what we saw were a lot of generic responses. And I won’t sugarcoat it. Companies were prepared for this demand. And they got the question and they answered. They said, we have been doing these investments for many years. We will have the products soon. We have the product roadmap, and there is a path to how we can monetize AI.
Some companies did a better job. By better I mean to be more detailed and descriptive. Microsoft, I would definitely put in that camp. And they had to. So much of their future strategy is about AI, the leadership they have with their ownership, part ownership of OpenAI.
Other companies, they may not have given you as much as you wanted. Apple is in that camp. But that’s typical Apple. Apple likes to say that we make beautiful, delicious products, and when we launch them, you’ll find out 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, a lot of answers about AI. But the real answers will come with time, when we see the actual products. Right now it’s mostly fluff.
Greg Bonnell: And you would expect to hear it from the tech companies. You said even outside of tech, how are other companies getting into the whole AI thing?
Vitaly Mossounov: Companies across the board are asked these questions. And they are either asked, is this a big threat to you? For example, there are some companies for IT services, but even outsourcing areas such as finance and accounting, there is a large company in the US on the New York Stock Exchange, they were asked, hold on a second, you are outsourcing – large 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 to this in a big way.
But this goes beyond that. This goes to medical device companies that now one day have the potential to go from just incredible but effectively dumb device makers to harnessing the power and understanding of the human body and the condition it operates in, the mind, the emotions and the use of that data and the companies that then monetize that data.
Bottom line, investors try to find out for each business model in each sector where the threats are and what the opportunities are.
Greg Bonnell: There is a certain novelty to it, although people who have worked in AI would say they have been working on this forever. But I think that for the general public there is something new in the developments lately. And around that there are some concerns. I mean, we have tech industry heavyweights who are concerned about how it might change our lives. And of course, then you have workers who are concerned about how it might change their lives, probably front and center before you talk about some of the other things. What about my job?
Vitaly Mossounov: Yes. And I think maybe it doesn’t get enough attention. It will take a few years for this to play out. But I’m definitely in the camp that AI will bring a productivity boost, especially for the knowledge economy, and we’ll see this play out in the short term and in the medium term. That is low hanging fruit. But in the medium to long term, and I’m talking about 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 will build with it, are automation tools. And these automation tools, the companies that build them, are going to try a lot to automate their tasks by, well, people. And even if they are only partially successful, this will have the effect of suppressing wages. So, mid to long term, be very careful with this.
And we have already seen management teams point to this. The CEO of IBM (IBM) a few weeks ago on the record said that he is looking to automate as much as 30% of his back office and functions such as HR. It’s all talk now. Again, we don’t want to get ahead of ourselves. But time will tell.
Greg Bonnell: I think the spin that might be put on it by corporations will be that, yes, we’re going to remove the drudgery. Because you don’t want to – people don’t want to do these mundane tasks anyway. But if your job is mundane tasks, and they are no longer there, and there is no other position for you, I can kind of see some of the fear that can grow from it.
Vitaly Mossounov: Yes. Every job has mundane tasks. But in general that is good language and good spin. But most of us don’t build or design the Sistine Chapel. Jobs are jobs, and people strive to do them well. Companies will try to unlock ways to save money. It is the capitalist imperative. And the language will have to be careful. And that is very careful language. But at the end of the day you will see hints of their true intentions.
And I think Microsoft dropped this hint. They said, look, we’re going to freeze a full salary. 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 freeze a full salary, but we’re going to use the money we save to invest in AI initiatives. So you’re actually telling the workers that we’re not going to pay you anymore, but we’re going to take that money and fund something that can replace you, yes, or eliminate the slack, as they might say.
Original Post
Post a Comment