Markets have taken a turn down today, after Facebook parent Meta reported its 1Q’24 earnings. The quarterly results were not the problem; rather, the company’s outlook for Q2 was below expectations, and its subsequent share price drop led to a general market decline.
Meta’s turbulent day is prompting some worries, turning this into a high-stakes earnings season. The rapid spread of generative AI pushed the stock markets to record highs in Q1, boosting expectations for earnings and profits. What we saw from Meta may be an indication that the Street is expecting too much from the tech giants.
However, this may not be the case for all of the ‘Magnificent 7’ mega-cap tech stocks. Bank of America analysts are recommending that investors buy into Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), two of the trillion-dollar-plus companies that make up the leading ranks of the tech world. Let’s take a closer look and find out what the optimism is all about.
Apple
We’ll start by looking at Apple, which, back in 2018, became the first Wall Street giant to break the trillion-dollar barrier. In 2020, the tech leader followed up by breaching $2 trillion, and early in 2022 it reached $3 trillion. The stock has pared back since then, but the company still boasts a market cap of nearly $2.6 trillion, making it the second-largest publicly traded firm on Wall Street. Apple’s financial results are typically commensurate with its size and high valuation; in its last complete fiscal year, 2023, the company generated $383 billion in revenues and realized a net income of $97 billion.
Apple’s success has come from a simple formula: the company makes products that work, and that people want. This isn’t to say that the company doesn’t face headwinds. Apple has, in recent years, become highly dependent on the iPhone series as a revenue driver; the smartphone lines generated 58% of Apple’s fiscal Q1 2024 sales numbers. However, there are signs that iPhone demand is peaking, and that Apple’s dependence on China as both market and component supplier may be turning into a weakness. The company has been seeing weaker iPhone sales in China, particularly as China’s domestic smartphone makers claim larger market shares in their domestic market.
Looking ahead, all eyes are on Apple’s upcoming Q2 2024 earnings report scheduled for release next Thursday, May 2, after the markets close.
In the Bank of America view, the overall expectations are too low. The bank’s 5-star analyst Wamsi Mohan writes of Apple, “Our revenue/EPS estimates are higher vs. Street ($91.5bn/$1.53 vs. $90.3bn/$1.50) as we see up to $1bn of revenue from Vision Pro sales which are likely not in Street models. For the June qtr (F3Q) we lower our iPhone estimates to 40mn (from prior 43mn, and vs. Street at 43.6mn) given weaker demand backdrop. Our F3Q revenue/EPS are $81.7bn/$1.32 vs. Street at $83.8bn/$1.33. While we acknowledge that the demand environment is weak, we believe the stock is already reflecting this and our aggregate estimates for the year remain relatively unchanged. Reiterate Buy on benefits from GenAI at edge with gross margin upside and momentum in Services.”
Mohan goes on to quantify his stance with a Buy rating, and a price target of $225 that points toward a 32% gain on the 12-month horizon. (To watch Mohan’s track record, click here)
Overall, Apple has picked up 30 recent analyst reviews, including 17 Buys, 11 Holds, and 2 Sells – for a Moderate Buy consensus rating. The stock is trading for $169.89, and its $200.71 average target price implies that AAPL will appreciate by 18% this year. (See Apple stock forecast)
Amazon
Next up is Amazon, a company that has expanded from its roots as an online bookseller, through its survival of the dot-com bubble, to its current incarnation as the world’s largest online retailer. Amazon is also deeply involved with many of the tech world’s ‘shiny new things,’ including AI, cloud computing, and online services. Like Apple, Amazon has seen extraordinary success and is today the world’s 5th largest publicly traded firm, with a market cap of $1.8 trillion.
Amazon’s core competency is its dominance of online retail. The company’s eponymous website receives over 2 billion hits per month, making it one of the world’s most trafficked internet addresses, and Amazon can boast of daily average sales revenue in the neighborhood of $1.3 billion. Amazon generates this revenue by being better than its competition – the company specializes in being a generalist, filling any order for any product and delivering to almost any location anywhere in the world. The company has a massive brick-and-mortar logistic network to support its e-commerce activity, with some of the warehouses featuring more than 1 million square feet of working space.
In addition to its core retail business, Amazon offers a wide array of digital services to its customers. The company’s products include the AWS cloud computing subscription service, home automation, TV streaming, ebooks, and online gaming – even online grocery orders, using the Dash Cart tech which the company is making available online at its Amazon Fresh stores and its Whole Foods subsidiaries, as well as at selected third-party grocers.
This is more than just big business; it’s gigantic. Amazon pulled in total revenues of $574.8 billion in calendar year 2023, up more than $60 billion from 2022. In the last quarter of 2023, the company’s revenue came to $170 billion, or 29% of the annual total. The quarterly revenue beat the forecast by $3.74 billion and was up 14% year-over-year. At the bottom line, Amazon saw an EPS of $1 per share, based on a net income of $10.6 billion.
For the upcoming 1Q24 results, slated for release on Tuesday, April 30, Bank of America analyst Justin Post anticipates Amazon to outperform expectations.
“We expect a 1Q beat, and while 2Q set up has some unusual q/q hurdles, we expect positive 1Q metrics and call commentary to be constructive & consistent with the recent Shareholder Letter. Given expanding retail margins, (robust ad growth with a likely 1Q Prime boost), and expected AWS acceleration, we think the stock is still set up for multiple expansion in 2024 as Amazon is valued at 12.5x EV/EBITDA, below its 10-year average of 16.8x,” Post opined.
For Post, this adds up to a Buy rating for AMZN, and his $204 price target implies a 17% upside potential in the coming year. (To watch Post’s track record, click here)
All in all, the Strong Buy consensus rating on Amazon is impressive, based on 42 unanimously positive analyst reviews. The stock is trading at $173.67, and its $212.41 average target price suggests a one-year gain of 22%. (See AMZN 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.
