Earnings season recap for Nasdaq Helsinki and mega techs
The Helsinki Stock Exchange has had a sluggish earnings season. Most companies reported lower revenues and profits, which was of course to be expected. The old earnings kings stumbled in a difficult market, such as Kesko, which fell well short of expectations due to the weak construction cycle. Sales margins for renewable fuels, which are critical to Neste's value creation, are melting away, which has not pleased investors. Kempower, the EV charger company, shifted gears from growth to reverse with order intake at low levels.
However, there have been positive surprises from companies that have already experienced a lot of bad news. The construction company SRV even turned a profit despite the weak market situation. Residential construction is frozen, but other areas are doing reasonably well. Infrastructure builder Kreate is already seeing initial positive signs on the infrastructure side. The results of the forest industry companies Stora Enso and UPM continue to decline, but the forest industry has bottomed out and signs of a turnaround were strengthened. KONE has suffered from cost inflation and a weak market, but also sees the Western market stabilizing. China's share of revenue has already fallen to 22%. The interesting thing about KONE is that while it's hard to find a new growth driver for new elevator sales as China slows down, it's modernization and maintenance that is rolling in the profits. And there is plenty of potential in them. Among the successes, I could also mention Wärtsilä, which is really riding the green transition wave with its slightly less polluting marine engines.
According to Bloomberg, expectations have proved too optimistic in half of the more than 60 results published so far for the Nasdaq Helsinki general index. However, the data is skewed, as this is a calculation of EPS beats. For example, with this data Nokia beat forecasts, although the operating result left a lot to be desired. However, as Bloomberg calculates the total sum of the results, overall results have exceeded expectations due to giants such as Nordea and Nokia. But most sectors were more disappointing.
The times are tough. It’s somewhat worrying that Nasdaq Helsinki’s big names such as Nordea are either 1) at the top of their performance, from which it will be difficult to improve, or 2) their future prospects for profitable growth are under competitive threat, as is the case with Neste. Or they are plateauing in a difficult market, like Nokia. Without better performance from the big companies, it's hard to see much higher returns at the index level than what dividends provide.
But there should be no room for pessimism. It’s a bad habit for investors to extrapolate current developments into the future. When times are good, forecasts become optimistic. When things go south, companies' weaknesses are easily exaggerated.
The tech giants' earnings season
Tech giants, which together account for around 30% of the market value of the S&P 500 index, have had mixed results. So far, the results of the Magnificent Seven are growing, while the results of the remaining 493 S&P 500 companies are still collectively grumbling.
The result of electric car pioneer Tesla was a dumpster fire. Free cash flow, i.e., the cash flow generated by operating activities after investments, was billions in the red for the first time in a while. However, investors seem to be clinging to Elon Musk's ever unreliable promises: this time, on faster production of a new, cheaper model through compromises. At the same time, Musk is putting all his efforts into developing autonomous driving with the help of AI. He was bellowing on an investor call that you shouldn't invest in Tesla unless you think the company can solve the Rubik's Cube of the self-driving car.
Tesla sharply divides investors. Personally, I am neutral on the company. You don't want to bet against mad geniuses like Musk. However, if Tesla eventually turns out to be a bulk car company like the rest of the industry, the current market value of just under 600 billion will be a rosy pipe dream against the company’s earnings level of just above 10 billion. And even that level of performance is a question mark in the long drive.
Meta, the old Facebook, the family business of social media applications led by the second entrepreneurial successor Zuckerberg, doubled its profits. Cost discipline is working, and the increasing amount of advertising on Meta's own social media channels is flowing nicely under the line.
Investors, however, weren't attracted to the company's intention to plow those profits even more heavily into AI investments that won't turn a profit for years. At its worst, the stock fell nearly 20% after the results were announced, although it has since corrected upward. A few years ago, Meta's stock plummeted nearly 80% as Zuckerberg wasted money on his metaverse pipe dream. After a moment of restraint, he is back on the rampage, and because he has control of the company, there is no stopping him. Or maybe customers can, if they don't buy Meta's AI products. The company plans to invest USD35-40 billion in AI this year.
Of course, this level of investment is good news for AI giant NVIDIA, whose hardware is needed for AI computing, and it's obvious that Meta is a major NVIDIA customer.
While Meta's AI investments have been viewed with caution by investors, Google's parent company Alphabet and Microsoft, the world's most valuable company, said AI applications such as Microsoft's Copilot are bringing real profits to the companies’ coffers. Google's long-losing cloud business also turned positive. Thus, the massive investments in AI by both are justified by the results. Google also showed the maturity that comes with age by starting to pay a regular dividend.
In the quarter, Google's revenue grew 15% to 80 billion, and Microsoft's 17% to 60 billion. Despite their massive size, both are capable of profitable and vigorous growth, with no immediate end to their growth trajectories in sight.
