Latest Earnings Move the AI Goalposts From U.S. to Asia

It’s a tale of two earnings on both sides of the Pacific.

We’ve got the weak numbers from Meta Platforms (META) on the one hand on Wall Street, and the strong numbers from Microsoft (MSFT) on the other. Thursday is the first chance for investors to respond to the after-the-bell reporting the day before.  

Out in Asia, memory chipmaker SK Hynix (SKHY) (KR:000660) came in with disappointing earnings when it released during the Korean morning on Wednesday. And on Thursday, we have strong earnings from rival Samsung Electronics (KR:005930).

The chipmakers are rallying today after selling off hard in the last month. Is this a dead-cat bounce on the way down?

Or are we seeing the bounceback that chip investors have come to expect?

Meta vs Microsoft

In terms of the Meta versus Microsoft results, we’re clearly seeing the market attempting to identify winners and losers in the AI race.

It wasn’t too long ago that Microsoft was getting punished as part of the software selloff in late January and early February. At that time, the fear was that MSFT’s prime product would  be rendered irrelevant as AI claims the software-as-a-service market.

Now Microsoft is surging on Thursday because it is one of the first companies to demonstrate the ability to turn AI investment into profit. Its Azure cloud business saw sales move past $100 billion for the first time ever, with companies ramping up spending on Azure AI. Its Copilot AI assistant has its detractors, but still saw paid seats rise to “over 30 million” up from 20 million last quarter.

Meta, meanwhile, saw an earnings miss, and raised the floor on its capital-expenditure plans to between $130 billion and $145 billion, up from the $125 billion it projected last quarter. Free cash flow fell 91% due to those capex plans, so while its AI investment may well pay off, investors are disappointed that it is not already doing so.

Cash-Burn Concern

Meta’s cash burn matches the decline in cash flow at Google parent Alphabet (GOOGL), which last week notched its first quarter where it saw its first-ever decline in free cash flow as a public company, burning through $5.9 billion.

So we are now getting some answers as to what investors are seeking in these earnings. Prior to this set of numbers, higher capex caused the hyperscalers to sell off, but any signs of weakness or scaling back — Meta is on Thursday confirming the July 1 report that it is mulling plans to sell off excess AI computing power — also cause stock weakness.

Investors want to see signs that these early, massive moves into AI are already paying dividends, or soon will.

Hynix vs Samsung

I’m also scrutinizing those earnings out of South Korea. Do the numbers matter anymore?

It’s not that earnings are entirely irrelevant. But the stocks move more intensely based on sentiment over the entire AI trade.

The spending by the likes of Microsoft, Meta, Amazon (AMZN) and Google are good news indeed for the memory makers. Besides Hynix and Samsung, the other main beneficiaries are Micron Technology (MU) and newly listed Chinese upstart CXMT (SH:6888825).

So, we saw record, bumper numbers from Hynix… that were nevertheless disappointing. Operating profit shot up 557% to 60.5 trillion won ($42 billion) but still missed the 64 trillion won average estimate polled by LSEG. Sales jumped 257% to 79.3 trillion ($55 billion) but also missed the mark.

Hynix sold off 9.7% after its disappointing results, but it has made larger moves even when it didn’t deliver any market-moving news. The Seoul shares are down 24.8% this week after taking a 14.7% thumping on Monday, part of a “tech wreck” for the semiconductor sector as a whole.

Not All Roses for Samsung

On Thursday, Samsung shares are still down 0.7% in South Korean trade, compounding the 13.4% loss from Monday to leave the stock down 17.2% this week.

Samsung just reported Q2 sales of 171.5 trillion won, up 129.9% from the same time last year. That produced net income of 71.6 trillion won, 14 times the figure from Q2 last year, although tariffs and Samsung’s slow move into the top-flight High Bandwidth Memory chips that power AI depressed the figure last year.  Operating profit, at 89.5 trillion won, was up a dazzling 1,814% compared to last year. The operating profit outdid the 88.1 trillion analyst expectation.

There was some bad news in the Samsung number. While its chip division is on fire, its consumer-electronics wing saw sales drop 9%. Ironically, it blames higher component costs — the very same trends that are leading to such massive profits in its chip-production segment. Higher semiconductor prices are eating into margins for Samsung’s Galaxy line of smartphones.

Samsung says that chip supply will remain constrained certainly through 2028. It is both a reassurance and a concern that Hynix and Samsung are now entering into long-term contracts on chip supply. That secures future revenue streams but will cap price hikes. Samsung says it’s already locked in deals with its five-largest global data center customers, and is working on deals with another five.

Samsung’s earnings are causing a bounceback in semiconductor stocks today. Micron shares are up 15.0% in early going, but remain 30.1% lower than their all-time closing high on June 25. Oh, and tech investors are relieved the U.S. Federal Reserve didn’t surprise with a hike, although the odds of a rate rise in September are now running around 60%.

Crazy Summer Volatility

We are seeing a crazy push and pull in these stocks. While I have a feeling we will see semiconductor stocks lurch lower again in the next few days, what’s encouraging about the results from Hynix and Samsung is that these companies are highly profitable. The shares, despite their runup this year, are actually not all that expensive either.

Micron on Thursday is trading at a price/earnings ratio of 19.2, even given the day’s rebound. Hynix is in an unusual situation with U.S. share trading at a huge premium, as I explain in this recent story, but its SKHY shares on Nasdaq change hands at a p/e ratio of 19.7, while the Seoul shares trade at a p/e ratio of 12.5. Samsung stock trades at 16.6 times earnings, kinda splitting the difference.

Consider that the S&P 500 is currently trading at 26.6 times earnings, while the Nasdaq 100 is around 30.

Of course, we must watch future earnings from the chipmakers for signs of slowdown. The selldown since the June highs, however, has been induced by rapid deleveraging and the over-use of leveraged exchange-traded funds offering 2x or 3x exposure to the stocks. It wasn’t the fundamentals.

There will be further shakeouts this summer amid the slightly lighter volumes, with average volume on Nasdaq down 27.7% in July compared with June. The encouraging signs out of the Meta-Microsoft and Hynix-Samsung earnings pairs is that we’re getting a clear indication of what the market is looking for in terms of the AI trade — signs of profitability now.

At the time of publication, McMillan was long MSFT and DRAM.