Third-quarter earnings season is in full bloom and a slew of earnings tests for S&P 500 member firms are scheduled this week. This week’s earnings slate includes reports from marquee large- and mega-cap growth stocks, including some from the communication services sector. Some of those reports could affect exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those ETFs, which feature identical rosters, allocate 16.49% of their portfolios to communication services names. That makes communication the second-largest sector exposure behind technology in the funds.
QQQ and QQQM hold 11 communication services stocks, but Facebook parent Meta Platforms (NASDAQ: META) and Google parent Alphabet (NASDAQ: GOOG) dominate the ETFs’ exposure to that sector, combining for over 10% of the funds’ weights. That’s relevant because both companies step into the earnings confessional this week.
Alphabet, Meta Earnings Catalysts
As two of the largest American companies, Alphabet and Meta are among the most observed. Especially when earnings season rolls around. That scenario is likely to be heightened this week. Why? Because of each firm’s exposure to AI as well as their dominant perches in the internet advertising market.
Specific to Alphabet, analysts likely want more commentary on Bard – the company’s competitor to ChatGPT – as well as updates on Google Cloud and YouTube. Alphabet delivers results on Oct. 24 after the close of U.S. markets.
“Regarding YouTube, we expect continuing top-line growth, to be driven mainly by direct response ads. We’ll also look for more color about contributions from broad-based campaigns, which could be an indicator of advertisers’ sentiment about the economy for the rest of the year,” noted Morningstar analyst Ali Mogharabi.
Morningstar classifies Alphabet as a wide-moat stock with a four-star rating. The research firm also applies the wide moat designation to Meta, which reports Wednesday after the close.
In a new report, Mogharabi said he wants to see how AI has helped Meta monetize WhatsApp. He also wants to see how cost-cutting initiatives at the company are playing out.
“Regarding generative AI, we expect the firm to provide some color on the adoption of its large language models,” wrote the analyst. “With more usage of generative AI, we’d like the firm to discuss its latest plans for the metaverse. And whether it will relaunch its aggressive investments on that front. We think artificial intelligence is an important component of the metaverse.”
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