What happened
Tuesday is looking to be a divergent session for tech stocks.
As of 1:37 p.m., ET, shares of cloud computing company Fastly (FSLY 2.44%) were up by 7% while both Amazon.com (AMZN +0.53%) and Microsoft (MSFT +0.63%) were retreating on worries about the health of their cloud computing businesses, down 2.2% and 2.1%, respectively.
NASDAQ: FSLY
Key Data Points
So what
Big picture, tech investors are worrying Tuesday about an International Monetary Fund (IMF) report forecasting only moderate 3%-ish global gross domestic product growth over the next five years. This is despite predictions that economic growth in the world's two most populous nations, China and India, will rebound to north of 5% this year, and implies that the global economy is about to present us with its weakest performance in more than 30 years, according to CNBC.
Those macro concerns aren't fazing investors in Fastly, however -- that tech company is now basking in the glow of a bullish forecast from a Bank of America analyst. Seeing Fastly fast-approaching his previous price target of $16 a share, BofA Securities analyst Tal Liani hiked that price target to $26.50 on Tuesday morning, reported ratings-watcher The Fly, while maintaining a buy rating on the stock. "The Street still does not appreciate the sustainability of Fastly's turnaround story and the opportunities ahead," opined Liani, and in particular "Fastly's ability to benefit from its CDN differentiation, cross-sell security solutions, and crystalize edge compute solutions."
Of particular note are BofA Securities' forecasts for Fastly's earnings. According to the analyst, Fastly is likely to beat earnings expectations in both 2023 and 2024. Not only that, in 2024, BofA predicts that Fastly will earn a profit of $0.05 cents per share, though the average expectation among the analysts following the company (according to Bloomberg) is for a $0.07 per share loss that year.
Now what
I can see why all of that might bring a smile to Fastly shareholders' faces. But what about Amazon and Microsoft? Both of them operate massive cloud computing businesses -- AWS and Azure, respectively -- and these units are already massively profitable. Indeed, according to data from S&P Global Market Intelligence, AWS accounted for all of Amazon's profits last year. So why are those stocks not following Fastly higher?
Well, as it turns out, analyst notes may get the credit for their moves, too.
As regards Amazon, Roth MKM's Rohit Kulkarni wrote Tuesday that he's generally positive on the stock and maintaining a "buy" rating, citing "significant opportunities" to "optimize" prices both at its unprofitable retail business and at AWS. Problem is, in saying this, Kulkarni seems to have reminded investors of the concerns that Mizuho Securities raised about Amazon last week. Specifically, Mizuho worried that part of the "optimization" that has Roth MKM feeling optimistic involves Amazon customers shifting from higher-margin pay-as-you-go contracts toward lower-margin long-term contracts. While that's probably good news for Amazon in the long term, in the short term, it's going to make it hard for AWS to grow revenues by 13% this year, as most analysts are predicting -- and even harder for it to grow its AWS profits by 7%. In short, Mizuho thinks "optimization" is going to mean a short-term slowdown in the growth of AWS's sales and profits.
And now, Roth's analyst has reminded investors of this bad news.
Similarly, we see UBS analyst Karl Keirstead worrying that analysts' forecasts for sales growth in Microsoft's Azure unit are too high. As with Mizuho's worries over AWS, UBS's Keirstead says Microsoft's customers are seeking to rein in spending on cloud computing services, and he suspects this may not be a short-term trend at all. To the contrary, that cost-cutting could be deeper and last longer than investors are anticipating -- raising the prospect of Microsoft, too, missing expectations on the top and bottom lines.
Long story short, analysts' warnings of slowing growth in the tech sphere are aligning Tuesday with broader forecasts of slowing growth from the IMF. That should probably worry shareholders of Microsoft and Amazon, which -- trading at forward price-to-earnings ratios of around 27 and 64, respectively -- are hardly cheap today.
And as for Fastly, while I certainly understand the enthusiasm over a forecast that the company might potentially earn a $0.05 per share profit next year, I'd be remiss in not pointing out that even if it does, Fastly stock would be priced at a staggering 332 times earnings.
Caveat investor.
