This week has been huge for Magnificent Seven stock investors, with five of the seven largest companies in the world reporting.
We received Tesla’s (TSLA) results last week when our analyst Seth Goldstein explained the reasons behind the slowdown fears and how it could impact the company’s near- and long-term profits, along with the outlook for the stock. He recommended waiting for the stock to offer a solid margin of safety before considering an entry point. That’s even after the recent selloff in the stock.
While not part of the Magnificent Seven, we also saw Netflix (NFLX) report its fourth quarter results last week. To complete the top stocks, we will have to wait an additional month for Nvidia (NVDA) to release earnings at the end of February.
(The Magnificent Seven stocks include: Tesla, Meta, Alphabet, Amazon, Apple, Microsoft and Nvidia.)
Of the stocks that reported this week, investors were more excited by some than others. Here’s what happened, and which companies delivered on expectations.
Magnificent Seven Stocks – Those Earnings in Full
Meta – Dividend Declared, Fair Value Hiked
Key Morningstar Metrics for Meta
• Fair Value Estimate: $400.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
On Thursday as markets closed in the US, three of the largest companies dropped their fourth quarter earnings reports, and one of the highlights was Meta (META). The owner of Facebook, Instagram and WhatsApp has instituted a dividend for the first time alongside share buybacks, which our analyst Ali Mogharabi is commending. Total fourth-quarter revenue of $40 billion was up 25% from last year, driven by both advertising revenue (up 24%) and reality labs (up 54%), which was helped by strong holiday sales of Quest 2 and Quest 3 VR headsets. Operating margin expanded to 41% from 20% last year.
The stock rose sharply after the earnings so is now trading above our new fair value estimate.
After reviewing the results, Morningstar is more optimistic about Meta’s profit margin expansion and increased the fair value to $400 from $322. However, Mogharabi believes the stock remains overvalued.
“Meta’s advertising growth may benefit in 2024 from easier comparisons and political ad spending, but we foresee a slowdown in 2025-28 as economic growth moderates. The traditional drivers of digital ad spending growth, such as online users and mobile expansion, are less influential. Innovations like artificial intelligence may improve ad effectiveness and efficiency but won’t significantly accelerate spending growth in our view.”
Amazon.com – Retail Profits Strong
Key Morningstar Metrics for Amazon
• Fair Value Estimate: $185.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
Wide-moat Amazon (AMZN) reported strong fourth-quarter results and offered a mixed outlook relative to Morningstar’s expectations, including in-line revenue and better profitability. Profitability was impressive, with operating profit coming in at $13.2 billion, compared with the high end of guidance at $12.0 billion, resulting in an operating margin of 7.8%, compared with 1.8% a year ago, and representing the best fourth quarter in at least a decade. Retail profitability was stronger than anticipated, and Morningstar sees positive developments on the demand front in areas like Amazon Web Services and advertising. But while margins were good across segments, Morningstar’s analyst Dan Romanoff believes there’s still room for further improvements.
The earnings report seems to have been well received by investors as the stock price rose on Friday, February 2.
After looking at the Q4 figures, Romanoff has raised the fair value estimate of Amazon to $185 from $155, largely based on raising the operating margin outlook by 160 basis points for 2024, and similar margin expansion over the next several years. Relative to Morningstar’s model, online stores, third-party seller services, or 3P, and advertising drove the vast majority of upside, consistent with the last quarter. Subscription services were ahead, AWS and other were in line, and physical stores were slightly shy of Morningstar’s assumptions.
Apple Earnings – iPhone Sales Hold Up
Key Morningstar Metrics for Apple
• Fair Value Estimate: $160.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Apple (AAPL) is the only company that reported this week where our analysts maintained the same fair value estimate. According to analyst William Kerwin, this is due to a lowering of the short-term revenue forecast balanced with a raised expectation for profitability. December quarter revenue rose 2% year over year to $119.6 billion. Growth was led by iPhone and Apple’s services, up 6% and 11% year over year, respectively. The firm’s wearables segment declined 11% year on year, likely due to patent issues with Apple’s Watch lineup that temporarily took the newest line of products off shelves in the quarter.
Apple shares went about 3% lower following results, likely due to weaker China results and lower iPhone expectations, but Morningstar continues to see the stock as overvalued.
The headwinds in China are a result of elongated personal device replacement cycles (ie when people trade in their old smartphones) and more aggressive domestic alternatives, Kerwin notes. He also says Apple’s December quarter iPhone revenue and gross margin exceeded expectations, but he still believes the iPhone will see a softer adoption cycle this year, therefore lowering the fiscal 2024 year forecast for iPhone revenue to a modest decline. However, the gross margin of 45.9% was impressive and driven by record gross margins for both products and services.
Microsoft Earnings – AI Steals the Show
Key Morningstar Metrics for Microsoft
• Fair Value Estimate: $420.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
Microsoft (MSFT) released its earnings after the markets closed on Tuesday, boasting results that beat expectations across the board. Artificial intelligence was yet again the star of the show as it according to Microsoft contributed 600 basis points to the growth of its cloud business Azure – twice that of last quarter. In the December quarter, it recorded $62.0 billion in revenue, up 18% year on year. Productivity and business processes grew 13%, intelligent cloud grew 20%, and more personal computing grew 19%.
Despite this, the company’s share price fell as investors were hoping for even better results.
After earnings, Morningstar’s equity analyst Dan Romanoff raised the fair value for the company from $370 to $420, finding the outlook encouraging: “Even though management will not admit as much, we continue to see indicators that the demand environment has improved at least modestly,” he says. Morningstar has also raised its revenue growth and margin estimates by approximately one point each over the next five years. Despite this increase, Romanoff still sees the shares as fairly valued.
Read Dan Romanoff’s full take in this article.
Alphabet Earnings – Google, YouTube Growth
Key Morningstar Metrics for Alphabet
• Fair Value Estimate: $171.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
Alphabet (GOOGL), too, dropped its Q4 earnings on Tuesday. The Google parent reported total fourth-quarter revenue of $86.3 billion, up more than 13% from last year. The “network effect” was the big winner, driving continuous growth at Google search and YouTube during the fourth quarter. And, increasing demand artificial intelligence accelerated cloud revenue growth. However, continuing weakness in Google’s advertising technology business, or Google network, pressured total advertising growth a bit.
Alphabet’s stock price fell modestly after the results.
Ali Mogharabi, Morningstar’s equity analyst, says Morningstar has inceased revenue projections for Alphabet as the acceleration in cloud revenue growth, further monetisation of YouTube, and the continuing steady growth in search likely will more than offset the impact of declining network segment revenue. Model adjustments result in a $171 fair value estimate, up from $161.
