Q1 Results: Can Artificial Intelligence (AI) Keep the Momentum? – May 26, 2023

Nvidia analysts (NVDA – Free Report) have a hard time finding superlatives to describe the chipmaker’s blockbuster quarterly results. In light of Nvidia’s May 26 earnings release, many analysts saw the company’s AI influence as an uptick versus consensus estimates. But the stock had already doubled this year prior to the release of those AI hopes on Wednesday.

It’s humbling to admit that I thought the stock was “perfectly valued” and was skeptical that Nvidia could do anything with its earnings results to meet those lofty expectations. Remember, we’re part of Nvidia’s “fan club” as we’ve held the stock in the Zacks Focus List portfolio since May 2019.

The stock’s performance since the quarterly release is in a class of its own, and for good reason. In the current uncertain macro environment, Nvidia raised second quarter revenue guidance by more than +50%, driven by robust data center demand reflecting momentum in generative AI and large language models. Importantly, Nvidia has pointed out that these demand trends have a high level of transparency over the coming quarters.

There are legitimate questions about how sustainable this growth trajectory will prove and whether Nvidia will be able to maintain its first-party lead as the competitive landscape tightens over time.

We’ve all had a glimpse of the potential of Generative AI by playing around with ChatGPT and Google Bard, and imagined that this technology could increase efficiency. However, it is legitimate to be skeptical about both the trillions of dollars in TAMs that the AI ​​revolution will unleash and the emerging rumors of an “AI bubble”.

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Nvidia isn’t the only one riding the AI ​​wave, with Microsoft (MSFT – Free Report) and Alphabet (GOOGL – Free Report) already battling for supremacy. Alphabet’s earlier AI efforts didn’t particularly impress the market, and many were beginning to believe that Microsoft could use AI to bolster Alphabet’s hold in the search market. But Alphabet appears to have regained its mojo, as evidenced by the stock’s recent performance.

The chart below shows the year-to-date performance of Microsoft, Alphabet and Nvidia.

The profit prospects for the “Big 5 Tech Players”, which include Microsoft and Alphabet as well as Apple (AAPL – Free Report), Amazon (AMZN – Free Report) and Meta (META – Free Report), have steadily improved recently . The group’s total profit remained essentially unchanged in the first quarter (down -0.4%) on sales up +4.3%.

Growth prospects are starting to improve from the current period (Q2 2023), with +8.9% expected profit growth on +4.9% higher sales.

The chart below shows the Group’s results of operations on a quarterly basis.

The chart below shows the Group’s results of operations on an annual basis.

Earnings overview for the Q1 earnings season

Including all of the quarterly reports released through Friday, May 26th, we now have the Q1 results of 486 S&P 500 members, or 97.2% of the index’s total membership. Overall profits for these companies are down -3.7% compared to the same period last year, even though sales are up +4.5%. 78.2% beat EPS estimates and 75.1% beat sales estimates.

The proportion of these companies beating both EPS and revenue estimates is 63.2%.

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Regular readers of our Earnings Commentary will know that we rated the overall picture emerging from the earnings season for the first quarter as good enough; not great, but not bad either.

With this reporting cycle now largely behind us, we can confidently say that corporate earnings are not headed for the ‘cliff’ that market bears have been warning us about.

In our view, the “better-than-feared” outlook for Q1 earnings season may be a bit unfair at this point given how resilient corporate profitability has proven. But the view isn’t all that bad either.

We have around 100 companies on board that report their earnings, including 9 S&P 500 members. This week’s schedule includes Salesforce.com, Macy’s, Broadcom, Lululemon, Dollar General and others.

Below we compare the first quarter results to date with those we have seen in other recent periods from the same group of companies.

The first set of charts compares the earnings and revenue growth rates of the companies that reported to what we’ve seen from the group in other recent quarters.

The following comparison charts put the percentages of EPS and revenue overruns in the first quarter in historical context.

The big picture of revenue

To get a sense of what’s currently expected, take a look at the chart below, which shows the current earnings and revenue growth expectations for the S&P 500 Index for the first quarter of 2023 and the following three quarters.

The chart below shows earnings and revenue growth on an annual basis.

For a detailed overview of the overall earnings picture, including expectations for the coming periods, please see our weekly earnings trends report >>>> Earnings outlook reflects stability

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