Big Tech is dealing with a 'nuanced' consumer slowdown: Analyst

The tech sector (XLK) is under pressure Friday, with the Nasdaq Composite (^IXIC) tumbling 2.5%. Goldman Sachs Senior Equity Research Analyst Eric Sheridan joins Market Domination to discuss his outlook on the digital consumer.

Sheridan notes that when it comes to the digital consumer, there isn't a "black and white" answer regarding the health of this segment. While acknowledging that consumer spending is slowing, Sheridan doesn't believe the economy is "hurtling towards any kind of recession in terms of the digital consumer and the digital economy."

Regarding AI return on investment, Sheridan observes that cloud computing companies are seeing the most direct returns on AI spend. However, he notes that it will take longer to see returns in the consumer landscape. "Most consumers have the same internet habits today that they had 18-24 months ago around the time that ChatGPT exploded," he states.

Sheridan explains that it takes time for consumers to adjust their computing habits. So while enterprises are seeing immediate returns, it is normal for consumer adoption to lag behind.

Watch the video above to hear which tech stock Sheridan recommends: Alphabet (GOOG, GOOGL) or Meta (META).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

It's been a rough week for tech with investors rotating out of the sector amid worries about AAA I among other things, sending the NASDAQ tumbling to its worst week since 2022.

And some investors do think there's still value to be found.

And with just a few minutes left to the closing bell on Wall Street, we're looking at how to navigate mag seven internet stocks and beyond with the Yahoo Finance playbook joining us now is Eric Sheridan Goldman Sachs, senior equity research analyst covering the US internet sector, Eric, it's great to talk to you especially since you are preparing for your big tech conference that is happening uh starting at the beginning of next week uh in San Francisco.

And I know among other things you're gonna be focused on on the state of the global digital consumer.

What do you want?

I mean, there's a lot of worries about the consumer out there.

So what specifically are you gonna be asking the CEO S at the conference?

Well, thanks for having me on and yes, we're excited about our conference.

Um Next week, I would say the most interesting area for us is how much nuance there is around the consumer.

Typically people want a good, bad black or white answer with respect to the current state of the consumer.

And what we're finding based on our research is that it's much more nuanced based on household income, uh, goods versus services, elements of how you spend discretionary versus non discretionary items.

So when we talk to ceos and CFOS from companies like Uber, doordash airbnb and booking across travel and rides and food delivery.

We think we'll hear interesting answers about the current state of the consumer.

But broadly, we think the consumer while slowing and normalizing in a post Pande world, it is not slow or normalizing beyond the degree of what we already think in terms of our forward estimates.

And to us, we don't think we're hurtling towards any sort of recession in terms of the digital consumer and the digital economy.

Eric, let me ask you another big trend I want your take on which is A I A lot of companies you cover Eric, you know, they're spending on A I they're spending on this tech, which companies that you cover Eric?

Can you see in Ro I on that investment?

Well, I think where you see a more direct roi today is when you look at the cloud computing companies so aws within Amazon or Google cloud, within Google, which is where enterprises are experimenting and deploying A I at the enterprise level today.

So there's Capex that goes out the door to buy capacity from the semiconductor landscape.

And then that quickly that capacity gets deployed and utilized into organizations like ours where we're experimenting with A I deploying A I at the enterprise layer where the longer duration, Roi is still a little bit less visible is how it plays out on the consumer landscape.

So I would argue that most consumers have the same internet habits today that they had 1824 months ago, around the time that GPT exploded onto the landscape.

Typically, consumer computing habits change over very long duration periods of time.

Think back to when mobile computing and how long it took before people were talking about mobile smartphones as being the more normative practice of how they accessed the internet.

So typically it happens quicker on the enterprise side and the hypercar of the cloud computing companies, it's translating almost immediately into higher workloads.

So if you go back and look at the earnings results last quarter, Aws cloud revenue inside Amazon re accelerated Google cloud revenue within alphabet has re accelerated over the last two orders.

That's where it's showing up immediately.

But the consumer landscape could be taken over a longer period of time.

I think it's a really important point, Eric.

Um And it also raises questions about what resources these consumer companies are gonna be allocating to A I and with what cadence?

Right?

So is that something that they're already talking A lot about, I mean, certainly the enterprise companies are talking a lot about that.

Um But what about on the consumer side?

Well, look across a whole host of names.

You're starting to see A I be talked about in the consumer facing dynamic.

So um I cover alphabet Google launched their pixel phones in the last couple of weeks.

They're talking a lot about Gemini.

They're talking a lot about Gemini, not only on their pixel phones, but across the whole Android ecosystem.

Apple, which is not covered by me will have their handset event next week.

Obviously, there's a lot of press reporting about Apple Intelligence A I being deployed across the IOS ecosystem.

You're now seeing advertisements talking about copilot and A I services across the Microsoft landscape.

So you're starting to see the bubbling up of advertising and showing the consumer what these services are, how they can use them, how they can embrace them, how they can work them into their day to day life from a computing utility standpoint, but we are still early innings on the consumer side.

Let me ask you, Eric, look at big tech, you've got some buys.

Um you like alphabet, you like meta.

If I force you to choose though Eric, is there one that you prefer the most?

Currently?

We believe the risk reward on alphabet is more favorable than meta from current levels.

There's a lot of noise priced into alphabet here.

Uh You know, there's a an tech trial starting next week.

There was a recent negative judgment in the search case with the DOJ that's now entered the remedy phase.

There's a lot of debate among investors about how A I broadly on the consumer side, whether it be open A I or perplexity or anthropic could disrupt the search landscape over the media to long term.

We don't see much changing in the search landscape anytime soon.

We believe that the earnings power of alphabet continues to have more of an upside node than a downside node.

And the market could be missing a lot of the opportunity that sits inside the youtube asset and the Google cloud asset.

So result of that, that's probably the most dislocated name in the sector right now.

Therefore, there would be a slight preference for alphabet over meta between those two by ratings.

Eric.

Great to have you on.

Thanks for your time and those picks.

Appreciate it.

Have a great weekend.

You too.