Investors to Big Tech: Mind Your Pocketbook

Big tech companies are sitting on huge piles of cash. Investors are judging them by how they plan to use it.

Three of the companies in the Magnificent Seven reported profits and sales in recent days that topped Wall Street’s forecasts, while a fourth missed big. But investors reacted less to those results and instead focused on what the companies said about their future spending plans, which drove dramatic stock-price swings.

Alphabet unveiled its first cash dividend, propelling shares 10% higher the next day and boosting its market value above $2 trillion for the first time. Tesla reported profit more than halved from a year earlier, yet shares rose 12% for their best day in more than two years after Chief Executive Elon Musk outlined plans to accelerate the launch of new and cheaper models.

Investors viewed other spending plans with greater scrutiny. Meta Platforms said it would increase its spending on artificial-intelligence infrastructure by up to $10 billion this year. That sent shares down 11%, their worst one-day performance since October 2022. Microsoft, which is also spending substantial sums on AI, declined in sympathy but bounced back after reporting its own results.

“We’re seeing pressure from investors on what you’re doing with your cash, what kind of return of investment you can get, what kind of strategic acquisitions you can make,” said Dan Morgan, portfolio manager and analyst at Synovus Trust, which owns shares of Alphabet, Meta and Microsoft.

The tech-heavy Nasdaq Composite index ended the wild week up 4.2%, its best performance since November. After a rocky start to the second quarter, the index is down 3.1% from its high earlier this month and up 6.1% in 2024. The broader S&P 500 has added 6.9% this year, after advancing 2.7% for the week.

Big tech stocks have been in the market’s driver’s seat since the beginning of last year, boosted by surging interest in generative AI technology. The companies have shoved billions of dollars into building new data centers and chips for AI, but many of them haven’t shown much tangible progress on generating new revenue from that investment.

Their large cash piles and the continuing AI frenzy make their capital spending plans especially important, said Morgan. Meta, Microsoft, Tesla and Alphabet ended the first quarter with a combined $275 billion in cash on their balance sheets.

“You don’t want to spend a ton of money on things that never come to fruition,” he added.

Investors are scrutinizing their plans, partly because of their increasing influence on the direction of the broader stock market. The Magnificent Seven group comprises nearly 30% of the S&P 500’s market value and is responsible for more than 40% of the index’s year-to-date return, according to S&P Dow Jones Indices.

In the coming days, investors will turn their focus to the results from the other members of the group. Amazon.com is scheduled to report Tuesday, followed by Apple on Thursday and Nvidia on May 22. They will also monitor the Federal Reserve’s policy decision Wednesday and Chair Jerome Powell’s press conference to gauge the potential for near-term interest-rate cuts.

Much of the enthusiasm in markets at the beginning of the year was tied to bets that the central bank would soon cut rates. That optimism has fizzled in recent weeks following data showing that inflation is proving stickier than many investors had hoped.

Tech stocks are particularly sensitive to higher rates, which reduce the worth of companies’ future cash flows in calculations that are commonly used to determine the value of a stock. Tech stocks also feature prominently in many index and mutual funds, so investors are likely to sell those stocks if they sour on the broader market.

Among other concerns, the recent gains in tech stocks have made them more expensive. Meta trades at about 21 times expected earnings over the next 12 months, above its three-year average of 19. Alphabet trades at 23 times, above its three-year average of 21. The S&P 500’s multiple is 20.

“When these stocks are trading like they are, i.e. high valuations, investors don’t have a lot of patience,” said Bob Doll, chief investment officer at Crossmark Global Investments. “They want instant gratification.”

Nvidia shares are again pacing the group, up 77% in 2024 after more than tripling last year. Alphabet and Meta are both up more than 20%, and Microsoft has advanced over 8%. Apple and Tesla are down 12% and 32%, respectively.

Although the tech bull market is still intact, investors have made clear they are raising the bar.

“I want to understand how they are thinking about balancing their capex spending with the unknown sort of business model of AI,” said Ayako Yoshioka, senior portfolio consultant at Wealth Enhancement Group.

Write to Charley Grant at [email protected] and Hardika Singh at [email protected]