By James Mackintosh
Elon Musk got the market's memo. Mark Zuckerberg missed it. Cathie Wood ignored it. The message: Stop shooting for the moon, and focus on making money.
Last week brought home what any competent CEO should already know about what investors want, as Tesla shares soared 12% after disappointing first-quarter results and Meta Platforms shares plunged 11% after decent first-quarter results.
Tesla gave investors what they have been demanding, pulling back from plans for an all-new car platform to speed up the launch of a line of cheaper vehicles. True, CEO Musk insisted that only true believers in self-driving cars -- something he has been promising for years, without delivering -- should be shareholders. But investors were willing to look past the idealism to the pragmatic low-cost launch plans, which should reduce its capital spending needs.
Meta did the opposite. Its sales were a little higher than expected in the first quarter, normally a good sign. But investors who panicked in 2022 about Zuckerberg's big-spending tendencies -- leading Meta to reverse course and slash jobs -- were put on edge again by its plan to sink billions of dollars more into artificial intelligence, even while it guided to lower-than-expected sales for this quarter.
True, the gains and losses after Tesla's and Meta's results were amplified because they represented a reverse of the huge moves this year up to the announcements -- when Tesla had plunged 40% and Meta had soared 40%.
And the market hasn't turned against corporate investment per se, with shares of Microsoft and Alphabet -- owner of Google -- both doing well after last week's results even as they continued to pour cash into AI.
Investors want a clear route to a return on corporate cash sunk into new projects, something both Microsoft and Alphabet are providing with higher profit margins. The old land-grab approach to tech spending that the market so enthusiastically supported until 2022 is now a sure way to tank the share price.
This shows up most obviously at Cathie Wood's ARK Invest and its Ark Innovation $(ARKK.UK)$ ETF. The ETF's portfolio of what Wood calls disruptive innovators has performed dismally as investors demanded that their holdings should at least have a clear route to making money.
The switch in investor mindset is down to bond yields. Money that flooded into risky ventures that won't pay dividends for years, if ever, was much more acceptable when interest rates were near zero than when the alternative is a Treasury yielding almost 5%. The importance of the link shows up in ARKK's correlation to Treasury yields: Recently, the ETF has had a strong tendency to fall when Treasury yields rise, as they have done this year, and rise when they fall, as they did last autumn. The ETF is down 16% this year.
The biggest stocks are mostly insulated from rising interest rates by their huge cash piles and long-dated fixed-rate bonds. That differs from the companies ARKK generally invests in.
The new investor mindset also shows up in the close link between Big Tech share prices and earnings expectations. The best explanation for moves this year in shares of the Magnificent Seven -- Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla -- was the change in expected earnings 12 months ahead. The biggest gains went to those with the biggest rise in forecast profits, led by Nvidia, and the biggest loss to Tesla, where profit expectations plunged.
Alphabet's decision to start paying a dividend might also be part of investors' desire for more money in the here and now. Again, if the alternative is a high cash yield on Treasurys, a stock with no dividend requires more confidence in its investments' working out than when rates were on the floor.
Corporate strategy still matters, of course. Because of the prospect of future AI demand for its chips, Nvidia saw its shares do far better even than the one-third rise in earnings expectations. Even though earnings forecasts for Apple were slightly up, its shares fell sharply because investors finally woke up to the strategic problem it has in China. Tesla's shares fell more than earnings forecasts, even after last week's bounce, as EV demand has dropped and shifted to cheaper hybrids.
CEOs might try to resist the new investor mantra of Show Me the Money. But if they do, the share price is likely to suffer.
Write to James Mackintosh at james.mackintosh@wsj.com
(END) Dow Jones Newswires
April 28, 2024 05:30 ET (09:30 GMT)
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