Tech…yes? Or tech…no? This week gave investors in the technology sector a lot to think about thanks to key earnings reports from Big Tech names like Meta Platforms, Microsoft, and Alphabet. Now, see what MoneyShow expert contributors think about the group and where it’s headed NEXT.
Michael Murphy New World Investor
Apple Inc. (AAPL) is down more than 13% this year due mostly to demand concerns in China, which are widely known. What is not yet in the stock, but will be soon, is how far along Apple is in integrating AI into its devices.
I expect major announcements on AAPL’s progress with generative Artificial Intelligence at the Worldwide Developers Conference in June, followed by an AI-based iPhone 16 announcement in September.
Apple
Bloomberg reported that Apple will focus the next version of its M-family of processors, the M4, on artificial intelligence to boost Mac sales. The M4 is already nearing production and will eventually be put into every Mac, with announcements to come as soon as this year.
Apple will give new iMacs, MacBook Pro, and Mac Minis the new chips. Market research firm IDC said Apple shipped 4.8 million Macs during the March quarter, up 14.6% year-over-year. It held 8.1% of the global PC market as of the end of March, up from 7.1% in the year-ago period.
Needham cut their estimates for the March quarter, citing weakness in the iPhone and China. They cut their revenue estimate 4% to $90.8 billion, and cut their earnings estimate 7% to $1.51 per share. But the consensus already is at $90.78 billion and $1.51 – they are just getting in line with the rest of the Street. They kept their “Buy” rating and $220 target price.
Apple’s May 2 earnings announcement probably will be mildly disappointing, although Services revenue will set another new record. But the tip-off will be if the stock goes up over the following few days – that would set off a scramble to get back in. My first target is $225 to $250 by this time next year.
Recommended Action: Buy AAPL.
Marvell Technology (MRVL) carries CFRA’s highest investment rating of 5-STARS, or Strong Buy.
Our recommendation reflects our outlook for improving trends in the coming quarters and AI opportunities. We see greater AI momentum as adoption for generative AI/language learning models grows. MRVL’s custom silicon business could rival its optics business in the next three years.
We think customer inventories across all markets appear to be normalizing and confidence is improving, which should drive a 2H recovery. All said, a recovery in cyclical businesses, plus strong AI momentum, has the ability to drive upside to consensus expectations.
The company presents revenue from five end markets: data center, carrier infrastructure, enterprise networking, consumer, and automotive/industrial. AI revenue is driving data center upside, and we think its pipeline offers upside, given opportunities tied to its optics business and initial revenue ramp from its silicon compute customers.
Despite ongoing struggles in non-AI-related business, we finally believe these businesses are set to bottom in Apr-Q at extremely depressed levels, with pronounced sequential declines expected in the current quarter within carrier, enterprise networking, and consumer. This is on top of sharp declines that were seen in both carrier and enterprise networking the prior quarter.
As customers continue to shift investment from traditional to accelerated infrastructure, we expect data center to drive the majority of MRVL’s revenue growth going forward. AI was a key driver of the company’s data center growth in FY 2024, contributing over 10% of total company revenue, well above the 3% in the prior year.
MRVL’s momentum accelerated throughout the fiscal year, with AI revenue well over $200 million in Q4, driven mostly from optics. In FY 2025, we expect this trend to continue driving another strong year for MRVL’s data center end market, driven by both its custom silicon AI business and optics business.
MRVL has an opportunity to address compute and AI through its cloud optimized silicon platform. Today, we see cloud customers enhancing their AI offerings by building custom accelerators of their own design to address their specific needs. This is a core part of MRVL’s cloud optimized silicon strategy, and we now see a much larger and faster-growing opportunity for custom compute and AI infrastructure.
We think MRVL’s valuation is enticing from a historical perspective and given growth opportunities attached to the company. Our 12-month target is $94 on a P/E of 34.8x our CY 2025 EPS view, above peers, but comparable to its three- and five-year forward historical averages of 30.3x and 33.7x, respectively. We forecast operating EPS of $1.82 for FY 2025 and $2.70 for FY 2026.
Risks to our view include slower-than-expected growth in core markets like data centers and carrier infrastructure, narrower-than-expected margins, and rising competition. Although we expect easier comparisons following a inventory correction, macroeconomic concerns may cause any upswing in 2H 2024 to be short lived.
Nancy Tengler Laffer Tengler Investments
The theme so far for Q1 earnings is “beat on profit, slowing revenue, and reduced guidance.” The industrials so far have been disappointing, which is consistent with a slowing economy and a soft landing.
A few examples include:
- Fastenal Co. (FAST) missed on revenues and earnings per share and reported fastener sales down 4% year-over-year, with prices decelerating at a rapid pace. Fastener sales are a close reflection of manufacturing and construction.
- Snap-On Inc. (SNA) also missed big on sales but beat on EPS. The share price was punished.
- Prologis Inc. (PLD) is an industrial REIT that trimmed guidance on macro impacts, including high interest rates, increased supply, and rising vacancies.
If the economy is slowing, that may be good news for Fed watchers. We continue to rely on our 1990s analogy, which we have written about extensively for over a year. Despite higher levels of inflation (on average 3% during the decade) and a 10-year Treasury yield which averaged 5%-7%...plus geopolitical shocks, a war, a labor shortage, an inverted yield curve, a soft landing for the economy, and productivity improvements...stocks enjoyed enviable returns. The Fed raised rates aggressively in 1994, cut three times in 1995, then mostly let it ride.
All of this reinforces our (currently unpopular) view that investors should focus on reliable earners like technology and consumer discretionary stocks (plus industrials and energy). We added to names in the fall of 2022 when the market had written off technology for dead, and again in 2023. That has worked out well.
Keep in mind: Large, profitable technology companies are beneficiaries of higher interest rates. Just take a gander at their balance sheets. In 2023, interest and investment income rose threefold to $1.6B for Meta Platforms Inc. (META), while Alphabet Inc.’s (GOOGL) haul increased 78% to $3.9B.
And despite handwringing over valuations, we are not in euphoria territory. See the above table from our friends at Alpine Macro. Then note the yield on the 10-year during the periods featured.
What does all this mean? We are using weakness to add to high-quality names. We reiterate our investing theme of old economy companies embracing this new industrial revolution of digitization and generative AI cloud computing.
Keith Fitz-Gerald Howard Tullman
Howard Tullman is general managing partner at G2T3V, LLC, while Keith Fitz-Gerald is principal at the Fitz-Gerald Group. Both experts have decades of experience analyzing and investing in private and public technology companies, and they sat down for an engaging MoneyShow MoneyMasters Podcast episode (which you can watch here) to explain the current state of play in the sector.
We dive first into the regulatory environment and how “Big Tech” companies like Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), and Microsoft Corp. (MSFT) are facing more scrutiny from Washington, as well as how smaller competitors and startups need to approach the big boys to survive and thrive.
Next, the conversation pivots to some of the innovative tech developments impacting productivity and business practices in industries as diverse as customer service/call centers and health care – as well as the not-so-helpful “wasted effort box” stuff that doesn’t give us the “seamless technology a la Star Trek” we really want.
We then cover interesting developments in Artificial Intelligence (AI), the evolving tech sector work environment, the advice Howard gives his portfolio companies, and more. Plus, both Howard and Keith weigh in on the investment windows of various tech investing firms – and how it doesn’t always align with what companies seeking investment really need. Toward the end of the segment, they share some practical guidance for stock investors looking to capitalize on pullbacks in the tech sector, as well as those looking to take a more defensive posture.
Finally, both Howard and Keith share a sneak peek of what they’ll tell attendees at the Investment Masters Symposium Silicon Valley, set for May 7-9, 2024 at the Hyatt Regency San Francisco Airport.
