Tech Investor Dan Niles talks what to expect from Big Tech earnings

Key Concepts

• Mag 7 Underperformance: Four stocks within the “Magnificent Seven” (Apple, Microsoft, etc.) are the worst performers in the S&P 500 in 2026.
• AI-Enabled iPhone: Apple’s potential release of a foldable, AI-enabled iPhone is seen as a key catalyst for a potential upgrade cycle.
• Memory Price Impact: Rising memory prices are expected to put downward pressure on margins for companies like Apple and Microsoft.
• OpenAI & Microsoft: Microsoft’s investment in OpenAI (27% ownership) is significantly impacting its Azure revenue, but also raising questions about OpenAI’s funding and profitability.
• Ecosystem Divergence: A divergence in performance between the Google ecosystem (up 20% since October 29th) and the OpenAI ecosystem (down 20% since October 29th).

Apple: The Case for a Rebound

Dan Niles expresses significant optimism regarding Apple (AAPL), despite acknowledging the challenges it faces. He believes Apple is “two to two years late on AI” and hasn’t released a compelling new phone in some time. However, he anticipates a turnaround driven by two key factors: a foldable iPhone and the integration of AI into Siri.

Niles draws a parallel to the iPhone 6 launch, noting that the transition from a 4-inch to a 5.5-inch screen resulted in revenue growth accelerating from 7% in fiscal 2014 to 28% in fiscal 2015. He points out that Samsung has offered foldable phones since 2019, highlighting Apple’s typical pattern of entering markets later but still capitalizing on them. This late entry, combined with the new features, is expected to fuel a “pretty solid upgrade cycle.”

He concedes that Apple’s margins will likely be impacted by rising memory prices, but argues that Apple’s customer base is relatively affluent and more capable of absorbing cost increases. He believes Apple will attempt to pass these costs onto consumers. Niles anticipates a strong quarterly report but suggests the real focus should be on the outlook for the rest of the year, which he believes will be positive if Apple delivers a competitive product in the AI space. As Niles states, “I may actually have a good product that I can buy relative to the Android ecosystem. For the first time since AI came out, and arguably before that.”

Microsoft: Navigating OpenAI’s Growth & Costs

Niles acknowledges the recent bounce in Microsoft (MSFT) stock, but notes that the market is currently ambivalent towards the company. He attributes Microsoft’s potential for solid numbers to the rapid growth of OpenAI.

He provides specific revenue figures for OpenAI: a $6 billion run rate in 2020, $20 billion in 2025, and a projected $44 billion in the current year. This growth is a significant driver of Azure revenue. However, Niles cautions that OpenAI’s losses are also increasing substantially. Microsoft’s 27% ownership in OpenAI means it is directly exposed to these losses.

Niles believes the market will need to discern whether to focus on Microsoft’s overall strong numbers or the financial implications of OpenAI’s ambitious spending. He highlights a divergence in performance between the Google ecosystem (up 20% since October 29th) and the OpenAI ecosystem (down 20% since October 29th), suggesting a market reassessment of the risks and rewards associated with OpenAI. Despite the OpenAI concerns, Niles expresses a preference for Microsoft, citing its diversified revenue streams and cash generation capabilities. He also notes that rising memory costs, similar to the impact on Apple, will affect Microsoft’s profitable PC sales through Intel.

The Impact of Memory Prices & Broader Market Trends

The discussion consistently returns to the impact of rising memory prices. Niles emphasizes that these costs will affect both Apple and Microsoft, potentially putting downward pressure on their margins. He notes that this effect is already being seen with Intel and its impact on PC sales.

The conversation also touches on the broader market trend of companies investing heavily in data centers to support AI initiatives. This investment, while necessary, is consuming free cash flow and contributing to market uncertainty.

Logical Connections & Synthesis

The conversation flows logically from a discussion of Apple’s potential turnaround to an analysis of Microsoft’s position, both framed by the overarching theme of the impact of AI and rising memory costs. Niles consistently connects specific company performance to broader market trends and technological developments.

The core takeaway is that while the “Magnificent Seven” stocks are facing challenges, opportunities exist for those companies that can successfully navigate the evolving landscape of AI and manage the impact of rising input costs. Apple, with its potential for a compelling new product, and Microsoft, with its diversified revenue streams and strategic investment in OpenAI, are positioned to potentially outperform despite these headwinds. The divergence between the Google and OpenAI ecosystems suggests a growing market scrutiny of AI-related investments and a focus on profitability.

Technical Terms

• S&P 500: A stock market index representing the performance of 500 large-cap companies in the United States.
• NASDAQ 100: A stock market index representing the performance of 100 large-cap non-financial companies listed on the NASDAQ stock exchange.
• Mega-Cap: A company with a market capitalization of over $200 billion.
• Fiscal Year (FY): A 12-month period that companies use for accounting and reporting purposes.
• Gross Margin: The difference between revenue and the cost of goods sold, expressed as a percentage.
• Operating Margin: The percentage of revenue remaining after deducting operating expenses.
• Run Rate: A metric used to estimate the annual revenue or expenses based on a shorter period.
• Azure: Microsoft’s cloud computing platform.
• Ecosystem: A network of interconnected businesses, technologies, and users.
• Free Cash Flow: The cash a company generates after accounting for capital expenditures.