It was another busy week of earnings for companies caught up in the artificial-intelligence trade. Good wasn't good enough, and any slippage was met with a selloff. But as Palantir Technologies showed with its Monday afternoon earnings blowout, it's still possible to impress skeptical investors and flip a negative narrative.
Here are my takeaways from the latest round of tech earnings:
Sticky Cyclical Fears
Storage chip maker Sandisk reported earnings on Wednesday, at the same time as its former parent, hard-drive storage maker Western Digital. Both companies had earnings beats but offered guidance that spooked investors who are naturally cautious around cyclical stocks.
Both kinds of storage are needed in data centers, so they are downwind of hundreds of billions of dollars in AI capital expenditures. Sandisk had especially mind-blowing numbers with sales up 372% from last year and a gross margin that rose 58 percentage points to almost 85%. Western Digital provided a more modest version of that sales and margin growth.
While these companies are being taken to new heights by the AI investment boom, they can't seem to shed their cyclical past. Investors are still waiting for the other shoe to drop. It's an old rule of thumb that the best time to get into these names is when things go from bleak to merely awful, and the best time to get out is when sales growth and gross margins are peaking. This leads to a lot of itchy trigger fingers when things are at their best.
An 85% gross margin could easily look like the peak, so the onus falls on guidance to keep investors optimistic about growth. Unfortunately, for Sandisk and Western Digital, their outlooks were uninspiring. Sandisk missed expectations altogether -- and both stocks were punished. Sandisk shares fell 7% on Thursday while Western Digital shed 13%.
The stocks had been rallying into earnings; in the five trading days leading up to earnings, Sandisk stock had risen 33% and Western Digital was up 12%.
Good, Not Great
Advanced Micro Devices stock was up 21% in the four trading days before it reported earnings on Tuesday afternoon. There was absolutely nothing wrong with its report or guidance, but the stock still dropped 7% the following day.
AMD posted small beats on earnings, revenue, and profit margins, and there was more of that in its guidance for the current quarter. With the stock having rallied, good-not-great was a cause for some profit-taking. AMD's revenue growth acceleration isn't expected until the fourth quarter when shipments of its new Helios AI servers begin ramping to large customers like Meta Platforms and OpenAI.
The Bears Won
Adtech company AppLovin has long been a darling among analysts and there has been a lot to like. The ad platform grows revenue quickly and has astoundingly high profit margins, even for a software company.
But the company reported its fourth straight quarter of decelerating growth, and the company's profit margin wavered, with guidance predicting another decline in the current quarter. The company had small misses all around, and it buttressed a trend of deceleration, which has been the bear narrative around the stock. The share price has now been halved this year.
The earnings results led to a massive derating. There were 16 new notes from Wall Street analysts on Thursday, and 15 of them lowered their price target, by an average of $127, to $554. But only two of the analysts downgraded the stock from a Buy, and the average of those 15 new price targets is still 65% higher than Thursday's closing price, after the stock dropped 20%.
The Bulls Lost
Datadog has been one of the few software companies seen as an AI winner. Coming into earnings, its shares had more than doubled this year, and it had a price/earnings ratio for the next 12 months over 100. Datadog is positioning itself as the software layer that allows automated monitoring and regulation of an organization's IT, including the growing number of AI servers and agents on enterprise networks.
The earnings report was strong, but guidance for the rest of the year implied a deceleration in growth. During the earnings call, the company admitted that its biggest customer -- an AI lab thought by analysts to be OpenAI -- was cutting back on its usage, despite signing a new long-term contract. The stock was down 19% the next day.
Narrative Flipped
Unlike Datadog, Palantir had been on the other side of the AI software narrative, with shares down 29% this year headed into earnings. The stock had a 180 forward P/E at the end of last year, and the software company, like so many others, got swamped by stories of AI disruption.
But as I argued a few weeks ago, Palantir software can provide an important layer sitting between proprietary enterprise data and AI models. Palantir backed this up with a 12th consecutive quarter that exceeded revenue projections, and the 13th quarter in a row of increasing sales growth, now up to 93%. In the last 12 months, more than half of revenue converted into free cash flow.
This may be the quarter in which investors look at Palantir in a different light -- as an AI winner, not loser. The stock was up 29% the day after it reported earnings and is now down 12% this year.
Later in the week, the beleaguered software company, Atlassian performed a similar act with its earnings, handily beating expectations for sales and profit, and offering much the same in current-quarter guidance. The stock surged 35% on Friday.
What's Next
Sentiment in tech is changing week to week, so investors should be careful in taking lasting lessons from any week's worth of results. That said, there are some things to be learned here. The facts on the ground can upend expectations and change the story. This week's earnings shifted the conversation the most for Palantir, Atlassian, and AppLovin.
Even in an environment of deceleration, AppLovin looks compelling after the postearnings selloff. Wall Street still expects sales growth of roughly 30% in 2027 and 2028, with adjusted operating margins around 80%. On Friday, the stock was trading at 18 times forward earnings, putting it below the S&P 500's P/E multiple for the first time in two years. The last time that happened proved to be a buying opportunity. AppLovin stock is up 334% since then.
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