Friday morning stock market thoughts

Mega cap earnings, China, a bond put

As the market continues to try to move higher standing in the way has been six of the seven mega caps. Apple, Alphabet (google), Meta, Microsoft, Amazon and Tesla all reported in the last two weeks, and ex-Meta, they are all lower. After a brief few weeks of out performance in early to mid December, the mega caps have gone back to being drags on the index. Apple is down because their growth ex-USA is negative, and including USA growth is maybe, possibly, gonna beat inflation. If you include buybacks and dividends you might get a 4 - 5% return from here over the NTM. So it’s getting sold until the boomers become excited to buy it lower at a 8% total return!

Besides Apple (and Meta which we’ll get to down below in the quick hits), the rest of the heavy hitters got smacked because of capex increases. As I talked about five months ago in my piece, AI is dead, long live tech, eventually investors are going to start getting prissy about these huge capex ballooning numbers. If the ROI on AI doesn’t kick up soon, and it might need to be next three - six months soon, investors are going to do more than trim the megas, Amazon and Google’s TTM charts will start to resemble Micosoft’s. Best case that is. Worst case its a mini Meta 2022 meltdown (not nearly to the same level to be clear) and the stocks retrace a lot of their 2024 gains.

Take google for example. If you add their capex, plus stock based comp, plus investments in R&D (which are stripped out of GAAP accounting), their gushing cash flow slows to a trickle, and suddenly instead of a company trading at 19 - 21x NTM (depending on the number) its closer to 35ish. Obviously what I sketched out isn’t how financial accounting works, but its worth considering as a thought experiment. The market is giving the megas a lot of slack because of how profitable they’ve been in the past with obscene growth. If that growth slows and profitability is in doubt not just because of high capex but also that depreciation is going to be faster than currently used (nvidia says they’re going to need to replace their AI chips every 18 - 24 months, which is why their stock is so high, while the megas use a 4 year depreciation schedule on their earnings, aka half the speed of Nvidia’s planned replacement cycle) something is going to have to give sooner rather than later. If the megas back off keeping their capex high into h2/2026, Nvidia bulls will start attending mass en masse around 55 a share. If Nvidia is right, well they had back to 140 - 150 area and the mega caps start breaking down.

Microsoft’s shareholder base is the most stable of the mega caps. They trust management to execute and don’t sell. That is, until last year when they started revolting by selling shares. Management got the message, and Amy said on the call that capex for the next FY won’t be as big of a jump, possibly no jump at all (really depends on the share price). I bring up Microsoft because the moment the cloud companies stock setting money on fire, or find a way to monitize AI Microsoft will be the best buy of the bunch. This will likely be after a massive throw up by tech shareholders of the whole bunch. Similar to how meta was the clear and obvious long in the Q4 2022 mess, Microsoft is the one I will be targeting, Management is way too buttoned up for them to be this reckless for long. I don’t expect this until sometime between April and October, but I want to be ready when it happens.

Outside of AI there was one other trend to note for the mega caps.