What should investors make of this year’s third-quarter earnings? The Q3 results have been pretty good, with 78% of companies reporting so far beating the forecasts, but stocks are still feeling pressure. One obvious sign of that pressure: the S&P 500 this week hit its lowest point since last May, and is just shy of correction territory.
The effect is most clearly seen in the ‘Magnificent Seven,’ a group of Big Tech giants whose gains earlier in the year carried the markets generally – but which are facing serious losses lately, despite solid earnings results. Four of these tech giants – Alphabet, Amazon, Meta, and Microsoft – have reported earnings so far, and all beat expectations. The group as a whole is expected to show a 33% year-over-year increase in profits this earnings season. Even so, the Magnificent Seven stocks are down 11% since the end of July.
But does this mean you shouldn’t buy in? Wall Street’s analysts are weighing in on that question, especially relevant with both Apple and Nvidia scheduled to release earnings in the near future. These are iconic names, leaders in their respective industries, and they have proven records of long-term success. Let’s put them into focus ahead of their upcoming financial releases to see where they stand now and why some analysts are recommending ‘Buy’ ahead of the earnings results.
We’ll start with a company that needs little introduction: Apple. Apple’s $2.67 trillion market cap makes it the largest publicly traded firm in the world. The company is best known for its iconic products, including the iPhone line, iPads, and MacBook computers. Apple’s success was built on its reputation for high-end quality and the professional-level applications that the Mac computer lines could support. In recent years, the company has been expanding its service segment.
Apple has also been working to integrate AI technology into its user experience. The company has used it to improve the autocorrect feature on its iPhone line and is using AI to create a smarter AirPod, making an earbud that will recognize when the user is having a conversation and automatically lower the volume.
Small tweaks have kept the product lines popular with consumers, and Apple weathered a serious industry-wide drop in smartphone sales earlier this year. Industry research showed that smartphone shipments fell 24% in 1H23, but Apple saw only a 6% decline in iPhone sales. By the end of the half, Apple held a 55% market share in smartphones.
In its last reported quarter, fiscal 3Q23, which ended on July 1, Apple posted revenues of $81.8 billion, marking a 1% year-over-year loss, and earnings of $1.26 per diluted share, indicating a 5% year-over-year gain. These results were considered positive, especially in light of the overall decline in smartphone sales. The company also reported having more than 1 billion paid subscription customers, driving its Services segment to record revenues. Looking forward, the Street expects Apple to report $89.4 billion in revenue and $1.39 in earnings per share when it reports its fiscal Q4 financial results on November 2.
Covering Apple for Morgan Stanley, analyst Erik Woodring writes of the upcoming earnings, “We expect Apple to post an in-line to better than expected September quarter (F4Q23), highlighted by MSD Y/Y iPhone revenue growth, accelerating Services growth, and record gross margins. However, we are more cautious on the December quarter (F1Q24) given iPhone supply shortages and uneven consumer spending, and believe Apple will guide to a revenue range that is both below normal seasonality and Consensus expectations. Looking at the rest of the mega cap tech names that reported this earnings season, the companies that have guided to December quarter profitability in excess of Consensus have seen greater post-earnings outperformance than those guiding closer (or below) to Consensus, and therefore we lean cautiously into earnings on Thursday.”
Even though he is somewhat cautious, Woodring goes on to give an upbeat bottom line: “However, with the potential for iPhone upside later in the quarter (if supply improves; akin to the iPhone 13 cycle) and/or a better than seasonal March quarter, Services growth accelerating, and shares near what we believe is a near-term floor (of $160), we are bullish over the next 12 months.”
The analyst’s stance supports his Overweight (i.e. Buy) rating on the shares, and his $210 price target implies a gain of nearly 23% for AAPL over the next 12 months. (Watch Woodring’s track record)
Overall, the analyst consensus on Apple is a Moderate Buy, based on 31 recent reviews that break down to 22 Buys and 9 Holds. The shares are selling for $171.40 right now, and their $203.35 average price target suggests a one-year upside potential of ~19%. (See Apple stock forecast)
Nvidia Corporation (NVDA)
Next up is Nvidia, a leader in the global semiconductor chip industry – and another of the stock market’s handful of trillion-dollar-plus companies. Nvidia has built its dominance around high demand for its top-end GPU chips, which were originally developed for high-end gaming apps but have found strong market share with professional graphic designers and AI developers as well. The launch of ChatGPT last November, and the subsequent boom in AI, opened up even more opportunities for Nvidia.
Prominent among those opportunities was the announcement from ChatGPT’s creator, OpenAI, that it will need as many as 10,000 new GPU chips in the coming year in order to maintain current performance levels of the popular chatbot. Nvidia is already a leading supplier for the Microsoft-backed company, and now looks at 2024 from the happy vantage point of having a satisfied high-volume customer.
It’s not just AI that’s powering Nvidia’s growth. The company saw more than $10 billion in data center revenue, as customers went all-in on the company’s high-end, advanced computing chips. This accounted for the majority of Nvidia’s $13.5 billion revenue in fiscal 2Q24, surpassing expectations by $2.43 billion. The firm’s non-GAAP EPS figure, of $2.70, was 61 cents ahead of the forecasts. Looking ahead to the company’s upcoming fiscal 3Q24 release, the expectations are for continued growth – revenue of $15.99 billion, and earnings of $3.37 per share.
For 5-star analyst Ambrish Srivastava, writing from BMO, all of this adds up to a bullish picture for the long term. Srivastava says of Nvidia, “We believe as a company NVIDIA is likely experiencing the best visibility it has ever had. NVIDIA highlighted that its visibility for data center is backed by purchase orders, which are required for allocation requests from customers given supply constraints, with customers with large commitments likely getting priority… NVIDIA appears confident in its ability to secure supply into next year, both on the CoWoS side for the more complete GPU solutions, as well on the networking side, particularly in infiniband.”
Looking ahead, the analyst, who is rated by TipRanks in the top 3% of the Wall Street stock pros, lays out a clear path for Nvidia in the near-term: “NVIDIA sees a very large addressable TAM ($1T installed base of data center infrastructure), with the company today addressing a single-digit percentage of the annual data center spend. NVIDIA sees a long-term tailwind of the installed base from general purpose CPUs to accelerated computing and generative AI.”
Srivastava quantifies his outlook on Nvidia with an Outperform (i.e. Buy) rating, and a price target which, at $600, points toward a robust 47% gain in the coming year. (Watch Srivastava’s track record)
Overall, Nvidia has a Strong Buy consensus rating from Wall Street, supported by 38 analyst reviews with a lopsided split of 37 Buys to 1 Hold. The stock is priced at $407.80 – and its $645.53 average target price suggests an appreciation of 55% on the one-year horizon. (See Nvidia’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.