What to Watch as Tech Titans Report Q3 Earnings

The upcoming week promises to be pivotal for markets as major earnings reports, essential economic data, and international developments align. Earnings season intensifies, with financial reports expected from five of the Magnificent 7 tech giants, whose combined market cap totals an impressive $12 trillion, or roughly 23.2% of the S&P 500. Alphabet, Meta, Microsoft, Apple, and Amazon will each provide valuable insights into key areas like digital advertising, AI, consumer demand, and cloud computing trends.

When major tech companies like Apple, Amazon, Microsoft, Alphabet, and Meta report earnings, their results heavily influence multiple industries due to the wide-reaching nature of their businesses. Apple's earnings, for example, have a strong impact on consumer electronics and semiconductors, as the company's performance drives demand for smartphones, wearables, and chip components. Additionally, Apple's influence extends to telecommunications, where iPhone upgrade cycles impact telecom operators and infrastructure investments, especially around the adoption of 5G technology.

Amazon's earnings have broad implications for e-commerce, logistics, and cloud computing. As a dominant player in online retail, Amazon's results provide insights into consumer spending patterns and the health of the retail sector, influencing both e-commerce and traditional retailers. Amazon's focus on logistics, including investments in fulfillment and delivery infrastructure, impacts the broader supply chain industry. Additionally, Amazon Web Services (AWS) is a key player in cloud computing, and its growth serves as an indicator of enterprise spending on cloud and digital transformation initiatives. Amazon's growing advertising business also has an increasingly important role, affecting the digital ad market alongside Meta and Alphabet.

Microsoft's performance affects cloud computing, enterprise software, and cybersecurity. With Azure as a major player in the cloud market, Microsoft's earnings offer insights into cloud adoption and spending priorities, competing directly with AWS and Google Cloud. Microsoft's stronghold in enterprise software through Office 365, Dynamics, and LinkedIn has a ripple effect on the broader software industry. Additionally, Microsoft's expanding footprint in cybersecurity influences the cybersecurity sector, as demand for integrated security solutions grows, impacting companies like CrowdStrike and Palo Alto Networks.

Alphabet and Meta heavily impact the digital advertising, media, and social media industries. Google's advertising performance through search and YouTube offers insights into the health of the ad market and influences ad tech and media companies. Google Cloud also provides insights into enterprise cloud spending. Meta's earnings are particularly influential in the digital advertising and social media sectors, as it continues to monetize platforms like Facebook, Instagram, and WhatsApp. Additionally, Meta's investments in VR/AR for the metaverse have implications for the emerging VR/AR industry. With all five companies investing heavily in AI, their results also provide a barometer for growth in AI applications, impacting data center suppliers and hardware companies involved in AI infrastructure.

In addition, the capital expenditures for these giants will influence market expectations for Nvidia's (NVDA) report at the end of November. Capex spend will remain a focus for investors as expenses for AI investments among the largest tech companies are putting pressure on free cash flow, as increased spending reduces the cash generated after operations and capex. This could lead to lower free cash flow estimates, potentially causing valuation contractions across the tech sector as price-to-earnings (P/E) ratios adjust. Consequently, mega-cap tech stocks may see limited growth in the near term and could trade sideways over the next few quarters as the impact of these capex increases becomes clearer.

The following is a look at each company as we prepare for their earnings report. 

Alphabet (GOOG, GOOGL)- Will it continue to protect its search mote?

Alphabet Inc. (GOOGL) is scheduled to report its Q3 2024 earnings on the evening of Tuesday, October 29, with Wall Street analysts expecting earnings per share (EPS) of $1.84 on revenue of $86.4 billion. This represents a year-over-year EPS growth of 19% and revenue growth of 13%. Additionally, Alphabet's operating income is forecasted at $26.44 billion, which would reflect a robust 24% annual increase. Google Cloud, which continues to be a crucial growth area for Alphabet, is projected to grow by 29% to $10.87 billion in revenue.

Google Cloud Revenue Alphabet's cloud business is one of its fastest-growing segments. Despite lagging behind Amazon's AWS and Microsoft's Azure, analysts will closely monitor its revenue growth, expected to be 29%, as an indicator of Alphabet's expanding cloud market share.

Alphabet's advertising business remains a core revenue driver. With potential pressure from competition and regulatory hurdles, its performance this quarter will be critical in assessing Alphabet's revenue stability.

Operating Income & Margins Operating income projections are strong, with a 24% increase expected. Cost management and margin expansion will be vital, especially under the new CFO Anat Ashkenazi, who will face scrutiny on expense control and transparency.

Alphabet maintains several strategic advantages that underpin its competitive moat and growth potential. Its dominant position in search, with around 90% market share globally (excluding China), continues to anchor its revenue streams, giving it a significant advantage in expanding AI capabilities. Google's AI tools, like the Gemini model and conversational AI embedded in search, position it to compete directly with companies like OpenAI and Microsoft. In addition, Alphabet's #3 position in cloud computing presents substantial room for growth, given the low current penetration of enterprise workloads in the cloud, and it benefits from AI-driven demand for cloud services.

Beyond its core business, Alphabet's investments in autonomous vehicle technology through Waymo, which recently closed a $5.6 billion funding round, represent a high-potential, long-term growth opportunity in the autonomous driving market. With a strong cash flow, Alphabet has also consistently invested in share buybacks, averaging $15-16 billion per quarter, which boosts shareholder value and signals confidence in its financial outlook.

However, Alphabet faces several challenges, particularly from antitrust and regulatory pressures. The ongoing DOJ lawsuit, along with potential outcomes that could impact Alphabet's lucrative deal with Apple to remain the default search engine on iOS devices, remains a substantial risk. The outcome of this case could significantly impact Alphabet's market dominance in search. Furthermore, the DoubleClick ad tech case presents another layer of regulatory scrutiny that could limit Alphabet's control over digital advertising, potentially reducing its future revenue.

Investors will be keen to hear about the Department of Justice (DOJ) probe into the company's alleged monopoly practices. Recently, a District of Columbia court judge ruled that Google operates as a monopoly, especially within its search business, prompting the DOJ to propose potential remedies, including a breakup of Google's search segment from its other businesses like YouTube, Cloud, Android, and Chrome. 

While an outright breakup seems unlikely, the DOJ may push for structural remedies to limit Google's ability to use products such as Android, Play, and Chrome to reinforce its search dominance. More realistically, Google might need to modify or abandon certain distribution deals, particularly its lucrative contract with Apple that makes Google the default search engine on iPhones. Although Google is expected to appeal any significant decision, these developments could signal structural changes ahead. Despite the potential challenges, the company's entrenched dominance suggests that a rapid decline in market share is improbable, though the evolving landscape, especially with the rise of generative AI, may gradually impact its position.

The rising capital expenditures in AI and data centers, while essential for long-term growth, are weighing on Alphabet's free cash flow. AI investments are critical, but if they do not translate into revenue growth as expected, Alphabet's profitability and valuations could suffer. Additionally, the emergence of generative AI poses both an opportunity and a risk, as it could disrupt traditional search models.

In Q2 2024, Alphabet (GOOG) delivered a strong performance with revenue, operating income, and EPS growing by 14%, 26%, and 31%, respectively. Total revenue increased by 13.6% year-over-year to $84.74 billion, modestly surpassing expectations, while operating margin rose from 29% to 32%. Advertising, which contributed 76% of Google's revenue, grew by 11.1% to $64.62 billion, showing consistency with prior quarters despite slight deceleration from Q1's 13% growth. Notably, Google Search revenue increased by 13.8% to $48.51 billion, while YouTube ad revenue grew 13% to $8.66 billion, though it fell slightly short of street expectations.

Google Cloud was a standout segment, with revenue surging by 28.8% to $10.35 billion, marking its first time crossing the $10 billion quarterly revenue threshold and achieving over $1 billion in quarterly operating profit. The Cloud segment saw accelerated growth driven by strong demand from major clients, including partnerships with Hitachi, Motorola Mobility, and KPMG. Additionally, Google's AI initiatives have started to pay off, especially in Search, where AI-enhanced overviews are improving user engagement, particularly among younger demographics. Google's Gemini AI platform also reached a milestone with over 1.5 million developers now using it, reflecting the company's growing influence in the AI landscape.

The stock saw a slight pullback, partly due to slower ad growth relative to Q1 and sentiment that had been high leading into the report. Investors were cautious about the impact of generative AI on Google's core search business and the minor shortfall in YouTube ad revenue. Furthermore, while headcount declined in Q2 due to cost-cutting measures, Google anticipates a slight increase in Q3, primarily in Cloud and technical infrastructure, which could affect operating margins. Despite these concerns, analysts remain optimistic, citing the resilience of Google's core businesses and the potential for long-term margin improvement through AI innovations.

Currently trading at around $165 per share, Alphabet's valuation—22 times projected 2024 EPS—presents it as relatively undervalued on a PEG (price-to-earnings-to-growth) basis. This modest valuation as an opportunity, especially given Alphabet's 20% and 14% expected EPS growth in 2024 and 2025, respectively. Although Alphabet's stock has underperformed this quarter due to regulatory concerns, it creates potential for near-term upside if the Q3 results exceed modest expectations.

In summary, while Alphabet's strong fundamentals and continued leadership in digital advertising, search, and AI integration support a positive outlook, the significant regulatory overhang and heightened competition in AI remain central challenges. Investors will be watching closely for updates on Alphabet's cost management, operating margins, and regulatory strategy under its new CFO, with attention to any strategic guidance on AI investment returns and cloud profitability.

Apple (AAPL)- The Debate around iPhone Sales

Apple (AAPL) is set to release its fiscal Q4 2024 earnings on October 31, and the market is poised for insights into its latest performance. Analysts expect Apple to post revenue of approximately $94 billion, reflecting moderate year-over-year growth as demand for its services and wearables segments remains strong. The consensus EPS forecast stands at $1.58, largely in line with prior expectations. 

Key areas of focus will be the performance of the iPhone 16, particularly its initial sales in China, and whether this latest model has provided the anticipated boost amid mixed sentiment on iPhone demand in the U.S. Additionally, Apple's recent $110 billion stock buyback announcement highlights its robust free cash flow, although it raises questions regarding the company's reinvestment priorities.

Apple continues to benefit from growth in its services segment, which has become a significant revenue contributor and stabilizer, especially as hardware sales experience cyclical fluctuations. The anticipated revenue from its high-margin services segment is expected to demonstrate high single-digit to mid-teen growth, driven by increased subscriptions and expansion of its global ecosystem. Furthermore, the iPhone 16's launch in China has shown encouraging signs, with early sales reports indicating a 20% year-over-year growth over the previous model's initial performance. Apple's integration of Apple Intelligence in iOS and hardware upgrades in the iPhone 16 series adds another layer of potential appeal, especially in markets with rising interest in AI.

Despite these positives, some concerns remain. Analysts are cautious about iPhone 16 demand in the U.S., where consumer sentiment around high-end smartphone upgrades is softening. This shift is further complicated by competitive pressures in the AI and VR markets, where Apple's new Vision Pro faces stiff competition from Meta's more affordably priced alternatives. 

Additionally, Apple's valuation—currently among the highest in the tech sector—has drawn scrutiny, as some analysts believe that the company's moderate revenue and EPS growth projections may not justify its elevated price-to-earnings multiple. This high valuation, combined with potential headwinds in iPhone sales and a possible deceleration in hardware growth, could weigh on investor sentiment if earnings fail to meet the elevated expectations.

Apple's Q3 earnings report showcased a solid performance, beating consensus estimates with revenue of $85.78 billion, up 4.9% year-over-year, and EPS of $1.40 versus an expected $1.35. Key growth areas included a record-setting $24.21 billion in Services revenue, up 14% year-over-year, alongside strong gains in iPad sales, which grew 24% year-over-year to $7.16 billion. Meanwhile, iPhone revenue came in slightly above estimates at $39.30 billion, down just 0.9% from last year's June quarter, which is generally a slower period for iPhone sales. Despite the year-over-year decline, Apple saw growth in iPhone market share across multiple regions.

Apple's Greater China revenue declined by 6.5% year-over-year to $14.73 billion, underperforming market expectations. China's performance remained a challenge due to unfavorable foreign exchange rates and intense competition; however, this quarter marks an improvement from earlier in the year, suggesting some stabilization. The company's wearable segment saw a slight dip, down 2.3% year-over-year, with the Apple Watch attracting a significant portion of first-time buyers, contributing to an expanding install base. Overall, these results indicate strength in Apple's non-China business, which grew 7% year-over-year, supporting a 5% growth in global revenue.

Following the release, Apple's stock reacted positively, climbing 1.3% in after-hours trading. While the quarter was marked by mixed results, with growth in Services and emerging markets offsetting challenges in China, investors are optimistic about Apple's forward guidance. The September quarter is expected to maintain steady growth, with anticipation building around the rollout of iPhone 16 and updates in Apple's AI-driven initiatives. This quarter's steady performance, despite some headwinds, has bolstered confidence in Apple's capacity for continued growth, particularly in its high-margin Services division.

Shares of AAPL are bumping up against key resistance at the $236 level. It has been on a steady rise but that has also led to a steep increase in its valuation. This, coupled with its weaker revenue growth among peers, will put a lot of pressure on AAPL to perform this quarter. AAPL carries with it the most short-term risk for traders if it fails to meet expectations. 

Meta Platforms (META)- Watching Ad Revenue around Elections, Holidays

Meta Platforms (META) is set to report its Q3 2024 earnings after the market close on Wednesday, October 30. Analysts expect the company to post continued revenue growth, with consensus forecasting a 17.6% year-over-year increase, reaching around $40 billion. Advertising revenue is expected to remain strong, with Meta's AI-enhanced ad targeting and campaign optimization tools contributing to demand from advertisers. The company's EPS is projected to land within the $4.00–$4.10 range, reflecting healthy operating margins that are likely to exceed 39%. As AI continues to drive ad efficiency and targeting, the market is anticipating a strong performance in Q3, along with guidance that may indicate high-teens growth for the upcoming quarter.

The positives for Meta this quarter include steady ad demand across its platforms, as advertisers benefit from Meta's AI-driven campaign tools, such as generative AI for ad creation and targeting improvements through Advantage+ ad products. Analysts are optimistic about Meta's ability to capture and sustain market share, especially in a challenging economic environment. Furthermore, Meta's Family of Apps—including Facebook, Instagram, and WhatsApp—boasts a daily active user base of over 3.3 billion, providing an attractive ecosystem for advertisers seeking broad reach and engagement. The upcoming Q4 holiday season and potential political ad spend are expected to further boost revenue into year-end.

On the product front, Meta's investment in Threads, Reels, and WhatsApp business messaging offers significant future growth potential. Threads is gaining traction as an alternative to X (formerly Twitter), while Reels continues to attract engagement that rivals platforms like TikTok. WhatsApp's business messaging services are also gaining popularity with small and medium businesses, further expanding Meta's revenue streams. Additionally, Meta's recent Meta Connect event showcased innovative AI and metaverse products, including the Orion smart glasses prototype, which could position the company as a leader in the emerging augmented reality market.

Despite these growth areas, Meta faces some concerns heading into Q3. There is some caution about the impact of high capital expenditures and rising operational costs, particularly in its Reality Labs division, which continues to report substantial losses. Reality Labs' operating loss is expected to remain above $4 billion, with no immediate profitability in sight. Meta's commitment to building out the metaverse is an ongoing financial burden, and some investors remain skeptical about the long-term ROI of these initiatives.

Other factors adding to investor caution include mixed signals from ad spending in the e-commerce sector, with weaker contributions expected from major Chinese advertisers such as Temu and Shein. Additionally, while political ad spending is expected to increase, the tailwind is limited compared to previous election cycles, posing a slight risk to revenue expectations. Analysts are also watchful of a shorter holiday shopping season this year, which could impact Q4 guidance if brands scale back on advertising.

Meta's Q2 2024 earnings report outperformed analyst expectations on nearly all major metrics, driven by robust revenue growth and improved ad performance. Revenue reached $39.07 billion, up 22% year-over-year and surpassing the $38.34 billion estimate. Advertising revenue of $38.33 billion also exceeded expectations, reflecting a strong +10% growth in ad impressions and a 10% increase in average price per ad. Family of Apps revenue and operating income both beat estimates, while Reality Labs revenue slightly missed expectations, coming in at $353 million against the $376.9 million estimate. EPS was $5.16, significantly higher than the $4.72 forecast, showcasing Meta's enhanced profitability amid rising ad demand.

Investors were generally optimistic about Meta's performance, particularly lauding the company's advancements in AI, which are already delivering tangible returns in terms of ad efficiency and user engagement. The Family of Apps, with 3.27 billion daily active users, continues to see growth, supported by Meta's AI-driven ad targeting and recommendation models. Investment firms raised their price targets, with several noting that Meta's AI applications—such as ad targeting improvements and content recommendation—are helping to unlock latent demand. Analysts also highlighted positive trends in Meta's other revenue streams and engagement metrics, particularly through new product features like AI assistants, which could enhance long-term user stickiness.

On the downside, Reality Labs remains a heavy drag on Meta's profitability, posting a $4.49 billion loss for the quarter, which was in line with expectations but continues to raise concerns over Meta's significant spending on the metaverse. While Reality Labs offers potential, it remains an uncertain investment, especially as losses are projected to increase. Despite this, Meta's expanding operating margin—from 29% last year to 38%—and its ability to continue growing advertising revenue have kept investors optimistic.

Overall, Meta's Q3 report is expected to reinforce the strength of its core advertising business, supported by AI advancements and a vast user base. However, the market will be closely monitoring Meta's spending trends, particularly on AI and metaverse projects, which have sparked both excitement and concern. Investors will be looking for clarity on Meta's longer-term strategy, especially any guidance around FY2025 CAPEX and operating expense expectations. 

If Meta can manage these expenses effectively, the stock could continue its upward momentum, especially given its ramp up in revenue growth and relatively low P/E valuation compared to peers. This stock strikes us as the top play of the group for bulls. 

Microsoft (MSFT)- Azure and AI-growth in Focus

Microsoft is scheduled to report its Q1 2025 earnings on October 30, and analysts are forecasting an EPS of $3.10 and revenue of $64.57 billion. Investors are focused on whether Microsoft's extensive AI investments and cloud services will deliver the expected results, especially in areas like Azure and M365 Copilot. With the company's stock underperforming the Nasdaq 100 (+14% YTD vs. Nasdaq's +21%), many believe that Microsoft's Q3 report could provide a pivotal moment for the stock, potentially catching up to AI-driven expectations if it demonstrates growth across its core business units.

Microsoft's robust ecosystem and AI investments are key growth drivers. We point to Microsoft's strength in cybersecurity, with its broad security solutions creating a strong moat in the enterprise segment. Additionally, Microsoft's partnership with OpenAI has positioned it as a leader in generative AI, with products like Azure AI and M365 Copilot enhancing productivity for business clients. Azure, expected to show around 29% year-over-year growth, remains a major revenue contributor. Analysts are optimistic that if Microsoft can provide more concrete data on AI adoption rates and its effect on Azure's growth, it could reassure investors and support long-term growth.

However, there are concerns over AI adoption and Microsoft's substantial capex requirements. Reports indicate that uptake of M365 Copilot has been slower than anticipated, and some clients are expressing dissatisfaction with its performance and pricing. This has led investors to question the short-term revenue upside of Copilot and similar AI tools. Elevated capex could limit near-term margin expansion, causing some to lower their price targets and temper growth expectations.

The competitive landscape also poses a challenge. Fears that competitors in the AI and cloud space may be closing the gap, potentially eroding Microsoft's initial advantage. Enterprise customers are moving cautiously with AI adoption, suggesting revenue contributions from AI could fall short of ambitious forecasts. This caution, combined with potential losses from Microsoft's OpenAI partnership, has led some to believe that Microsoft's premium valuation might be difficult to sustain in the face of these uncertainties.

In terms of future guidance, investors are eager for clarity on Microsoft's FY2025 capex expectations, especially given the reported reclassification of revenue across its segments. Insights into how Microsoft plans to navigate capex constraints while driving Azure growth would be crucial to investor confidence.

Overall, while the long-term AI and cloud outlook remains promising, Q3 could bring mixed results if AI-driven products fail to demonstrate significant adoption gains. Microsoft's ability to provide reassuring guidance on Azure and AI-related growth while managing elevated expenses will be essential to counterbalance investor concerns. With a diverse set of catalysts in play, this earnings report could play a pivotal role in shaping Microsoft's trajectory for the upcoming year.

Microsoft's Q4 earnings report delivered mixed results, with revenue and EPS slightly surpassing expectations, but Azure growth fell short, disappointing investors. The company reported $64.73 billion in revenue, slightly above the $64.52 billion estimate, and EPS of $2.95, beating the $2.93 forecast. Revenue from the Intelligent Cloud segment rose 20% year-over-year to $28.52 billion, just missing the $28.72 billion estimate, while Azure and other cloud services grew by 29%, below the anticipated 30.6%. Though Microsoft saw continued demand for its cloud and AI offerings, the Azure miss highlighted ongoing capacity constraints and led to a 7% drop in its stock post-earnings.

CEO Satya Nadella's comments emphasized the company's positioning in the AI sector, with AI contributing 8 points to Azure's revenue growth, an improvement over last quarter. Despite short-term pressures, AI-driven commercial bookings in Q4 set the stage for a potential acceleration in Azure growth during the second half of FY2025. Furthermore, Microsoft's ramped-up capex—up 51% year-over-year—underscored its investments in AI infrastructure, which could benefit partners like Nvidia and TSMC.

There were some concerns about Microsoft's ability to maintain growth momentum in the near term. The Azure miss, attributed partly to capacity constraints and softer demand in Europe, raised doubts about sustained cloud expansion. Additionally, the significant increase in capex, which reached $18 billion, added pressure on near-term margins. Microsoft's guidance suggested a potentially uneven growth path for Azure, with second-half acceleration contingent on addressing these capacity challenges.

Microsoft shares have hit the pause button as investors await further signs of growth reacceleration. MSFT has pointed to a second half surge in 2025 which means this report could fall flat of expectations. This would put some pressure on the long-term trend line at $425. If this cracks, it will be paramount for the stock to hold the $390-400 area. This would make for a solid entry for longer-term investors, assuming MSFT is able to deliver on its 2H25 promise.

Despite the mixed Q4 results, many analysts kept Microsoft in their top picks, citing its strong fundamentals and expanding AI portfolio, though some noted that the high expectations set by recent tech stock rallies leave little room for error.