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Q4 2023 earnings scorecard and Arm bonanza
Peter Garnry
Chief Investment Strategist
Summary: With most S&P 500 companies having reported, the Q4 2023 earnings season is nearing its end. We can observe various winners and losers based on different metrics. Companies exceeding analysts' expectations tend to generate positive market sentiment and the top five surprises on revenue among large US stocks include NextEra Energy, General Electric, Eli Lilly, Linde, and Meta. In terms of revenue growth Eli Lilly, Meta, Microsoft, General Electric, and Uber lead the pack in terms of fastest revenue growth during the quarter.
The winners and losers in Q4
With around 70% of S&P 500 companies having reported earnings we are getting closer to the end of the Q4 2023 earnings season. The table below shows the winners and losers of the earnings season. Positive revenue surprises are often key indicators of future sentiment and here the top 5 surprises among the largest US stocks are NextEra Energy, General Electric, Eli Lilly, Linde, and Meta. In terms of revenue growth, the fastest growing companies are Eli Lilly, Meta, Microsoft, General Electric, and Uber.
NextEra Energy is the most valuable US utility company and is spearheading the transformation towards renewable energy developing and operating renewable energy assets, selling battery solutions, and EV charging stations. Many investors may not know the company, but it has grown to $28bn in revenue from just $18bn in 2020 delivering net income of $6.9bn in 2023. The company reiterated in its Q4 earnings release its commitment to deliver EPS growth of 6-8% annualized through 2026.
Sometimes analyst estimates do not reflect the true underlying estimates priced in the market and thus often the share price performance around earnings release can be a good way to gauge the winners and losers. Based on share price performance the three best earnings and guidance came from Meta, Netflix, and Amazon. On the negative side, the market was the most disappointed about earnings and outlook from Tesla, Alphabet, and McDonald’s.
Arm shares are defying financial gravity
The big winner yesterday was the chip design company Arm that went public last year. Arm reported better than expected earnings and listed its earnings guidance driven by huge demand for AI and smartphone makers putting more cores into phones. The company guides fiscal Q4 (ending 31 March) revenue of $850-900mn against estimated of $778mn. According to Arm management the AI boom is not hype and the cycle has just begun and is the most transformational technology of our lifetime. One of the key drivers going forward is that a lot of its customers are shifting to a new technology version called V9 which comes with almost double royalty rate. Arm’s IP is used in electric vehicles, smartphones, TVs and cameras. While Arm is naturally talking their book, which any investor should take with a grain of salt, the strong guidance was strong and instrumental in lifting sentiment.
However, it is important to recognize as an investor that the expected growth rate is “only 22%” in the fiscal year that ends in March 2025 and that the company is already at around 40% net profit margin. Investors are right willing to pay more than 2x forward operating earnings of that Nvidia which is one of the most hyped large cap stocks in the world. Arm is an impressive company but when valuations reaches these levels investors should be cautious. The 2021 technology hype cycle is a stark reminder of this.
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