'AI Revolution' Key Narrative For Q4 Tech Earnings, Says Analyst, As He Flags A 'Glaring Positive' That Can Mitigate Bears' Valuation Concerns

Tech earnings season starts in earnest next week, with the likes of Netflix, Inc. NFLX, Tesla, Inc. TSLA, Intel Corp. INTC and International Business Machines Corp. IBM all in the mix. An analyst at Wedbush said on Tuesday that he sees the tech stocks belying bearish predictions.

Demand Perking Up: “All Street eyes are on 4Q earnings season and initial 2024 guidance for the tech sector to gauge underlying enterprise and consumer demand,” said Daniel Ives in a note.

There has been an uptick in demand for enterprise software and cyber security, and a clear surge in demand around major AI projects, Ives said, citing channel checks. Use cases are exploding in 2024, he said. On the flip side, the analyst noted weakness in small and medium businesses. ” Overall we
see ‘less caution’ from CIOs than we picked up in the field 3 months ago which is a glaring positive,” he said.

AI Key Narrative: The key narrative for fourth-quarter tech earnings is the “beginning of the AI
Revolution,” led by Microsoft Corp. MSFT and Nvidia Corp. NVDA, Ives said. “Monetization of Co-Pilot and customer conversations in Redmond are on an eye-popping pace as our checks are indicating MSFT is humming on the AI front heading into 2024” he said.

The analyst flagged “unprecedented spending” and demand for the 2nd, 3rd and 4th derivatives of AI across the software, chip and hardware ecosystem. He also warned of customers going slow on AI. “If customers wait to green light AI deployments they go to the back of the line given the chip/ GPU shortages forming around AI,” he said, adding that Nvidia is the “only game in town,” with Advanced Micro Devices, Inc. AMD and Intel Corp. INTC coming in only in 2025/2026.

Microsoft and Nvidia are the tip of the sphere of the AI Revolution, Ives said. While AI use cases will likely build markedly in 2024, 2025 will make the true inflection year of AI growth for Microsoft, according to the analyst.

“We believe the stock still has yet to price in what we view as the next wave of cloud and AI growth coming to the Redmond story in FY24 with a strong competitive cloud edge vs. Amazon, Inc. AMZN and Alphabet, Inc. GOOGL GOOG,” the analyst said.

Co-Pilot deployments alone can add about $25 billion in revenue to Microsoft’s topline by 2025, he added.

The analyst also sees Google, Datadog, Inc. DDOG and Palantir Technologies, Inc. PLTR as beneficiaries of AI use cases multiplying across enterprise and consumer landscape.

“While the bears will continue to fret about tech valuations, we believe Street numbers (and valuations) for 24/25 will move higher as this AI spending tidal wave hits the tech industry,” Ives said.

Wedbush Favorite Tech Names For 2024: