As tech stocks rebound, will the sector’s fundamentals also recover
Still-fragile consumer and business demand and continued supply chain concerns overshadow the industry.
Watch online ad revenue to see if executives expect a rebound anytime soon.
Shawn Cruz, Head Trading Strategist, TD Ameritrade
After a 2022 that most info tech investors (and companies) would rather forget, will Q4’s earnings offer major technology leaders a chance to reset expectations?
To a significant degree, it may depend on whether the world’s central banks can tame inflation without jacking up interest rates much higher. A failure by the Federal Reserve and its counterparts to engineer a so-called “soft landing” could lead to a worst-case scenario for the rate-sensitive tech sector: hefty borrowing costs accompanied by a demand-busting recession that slices advertising and product sales even further.
Such worries played an outsized role in tech’s struggles last year. So did China’s strict COVID-19 policy, the Biden administration’s stricter bans on sharing chip technology with Beijing, a general dip in cloud demand amid faltering economic growth, and an oversupply of chips waiting for sales of computers, smart phones, and video games to pick up.
None of this vanished with the flip of a calendar page, but tech stocks made some strides this month. Mega-cap companies like Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), and Nvidia (NVDA) rebounded a bit in early January after recently posting new 52-week lows. The Philadelphia Semiconductor Index (SOX) also clawed back from late-December weakness and recently posted five-month highs.
This week features earnings from AAPL, META, GOOGL, and AMZN (dates and consensus estimates below).
Stocks shine, but layoffs cloud picture
Recent brightness in tech stock performance hasn’t erased the gloom of steady layoff announcements over the last month and a half from some of the biggest tech firms ready to report in early February. These include GOOGL, META, AMZN, and Microsoft (MSFT), which reported January 25. In sum, tech firms have laid off nearly 200,000 employees in the last year.
There’s little doubt that cutting payroll by hundreds of thousands has made many analysts and investors feel better about these firms’ ability to control costs. Another theory suggests that all these layoffs are an attempt to get bad news out of the way quickly so companies can move on after a tough 2022. So, where’s the downside, except for workers losing their jobs?
Here it is: This avalanche of job cuts could be a sign that top-line growth is slowing for the tech sector and possibly has been for some time. That will force many companies to accept a slower environment going forward.
Q4 info tech earnings could fall nearly 10%
A closer look at what major cloud, chip, software, and smartphone makers might report in Q4 isn’t a pretty picture. According to FactSet, the info tech industry is expected to see quarterly earnings per share (EPS) fall 9.8% year over year.
That would make technology the fifth-weakest sector in the S&P 500® for Q4 earnings, a much worse performance than analysts had expected at the end of September. At that time, they’d pegged the sector’s Q4 earnings loss at just 1%. AAPL, MSFT, and Intel (INTC) have contributed most to the decline in analysts’ expectations since then, according to FactSet.
The research firm added that revenue for the sector is expected to fall just 0.6% in Q4, reflecting what looks like a tough margin environment. Analysts project net profit margin for the sector at 23.6% in Q4, well above the average for all S&P 500 sectors but down from 26% a year earlier and about even with Q3.
One thing to know: Expected tech earnings weakness may not be spread evenly across the sector. Semiconductors might be among the worst earnings performers in Q4 because “excessive inventories” remain a burden, according to research firm CFRA. The IT consulting and services subsector, on the other hand, might have a strong Q4; the same goes for semiconductor equipment. However, worries about a possible recession might’ve weighed on corporate cyber security spending during the quarter, according to CFRA.
It’s hard to generalize what to look for across the tech sector as companies report because so much of it defies generalization. Still, here are issues investors may want to watch that apply to this diverse mega-cap sector reporting this week:
- How is cloud demand shaping up in 2023 for companies like AMZN and GOOGL? It had been flagging last fall. Has the outlook improved, and why?What is current consumer demand like for popular electronic products like video games, cars, phones, and other devices that depend on semiconductors and other specialized components?Many of these firms have large supply chain operations in China. Has the recent reopening after extended COVID-19 shutdowns helped things at all? Also, what’s consumer demand like in that country?Is the strong U.S. dollar still a barrier to tech earnings growth, and how is it affecting overseas demand?Rising global interest rates clobbered the tech sector last year. Is that likely to remain a problem in 2023, or have companies adjusted to deal with higher borrowing costs?How’s the merger and acquisition environment shaping up so far this year after a slow 2022?
LOOKING UP: The Nasdaq-100® (NDX—candlesticks), which contains many large tech firms scheduled to report this week, recently moved above its December high and has been outpacing the S&P 500 (SPX—purple line) lately. Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Here’s a quick look at what to watch for as the following individual tech firms report.
Scheduled report date: Wednesday, February 1, after the close
Expected Q4 EPS (analysts’ consensus): $2.19
Year-ago EPS: $3.67
Expected year-over-year EPS change: –40%
Expected Q4 revenue (analysts’ consensus): $31.46 billion
Year-ago revenue: $33.67 billion
Shares of META lost more than half their value last year amid struggles with what Barron’s recently called the company’s “massive bet on the metaverse.” META has spent tens of billions of dollars developing the so-called “meta world” where customers socialize, work, and play in virtual worlds, but the effort, according to Barron’s, is “floundering.” META has lost more than $30 billion on these efforts since 2019 and announced an 11,000-worker layoff in November.
Just before the layoff news, META disappointed Wall Street with its Q4 guidance, and shares fell to six-year lows. Shareholders are likely approaching Q4 earnings with trepidation, wondering what other unwelcome news might be in store as industry thought leaders continue to question metaverse demand and note META’s struggles in other facets of its business, like advertising.
Scheduled report date: Thursday, February 2, after the close
Expected Q4 EPS (analysts’ consensus): $1.95
Year-ago EPS: $2.12
Expected year-over-year EPS change: –8%
Expected Q4 revenue (analysts’ consensus): $122.05 billion
Year-ago revenue: $123.94 billion
AAPL shares had a banner day the last time it reported in October, rising nearly 8% to above $155. Strong Mac sales, among other things, helped the mega-cap iPhone maker outpace Wall Street’s quarterly EPS and revenue expectations.
In the background lurked some less cheery tidings, including quarterly demand that was slower than expected for iPhones, iPads, and services.
AAPL shares recently traded about 10% below where they stood that bright fall day, still forging their way back from a fresh 52-week low of $124.17 posted the first trading session of 2023. Shares showed vigor since then, but investors may need a healthier performance from iPhones and services when AAPL reports if they’re going to stay enthusiastic about the stock.
AAPL doesn’t provide much in the way of guidance, making it hard to know quite what to expect when the company opens its books Thursday afternoon. There is concern, however, about COVID-19 issues in China during the most recent quarter, which could’ve potentially negatively affected iPhone production, according to analysts. Lower iPhone shipments, however, could be balanced slightly by higher average selling prices.
Scheduled report date: Thursday, February 2, after the close
Expected Q4 EPS (analysts’ consensus): $1.18
Year-ago EPS: $1.53
Expected year-over-year EPS change: –23%
Expected Q4 revenue (analysts’ consensus): $76.54 billion
Year-ago revenue: $75.33 billion
GOOGL approaches earnings with shares up sharply so far this year but still down dramatically from year-ago levels. More than most tech stocks, GOOGL relies on advertising to fuel progress, and the online ad space just hasn’t been firing on all cylinders lately.
Ad spending in the tech and media sectors slowed dramatically in 2022, media and tech research firm MoffettNathanson told The Atlantic recently. By the end of the holidays, there was “hardly any money being spent at all,” the research firm said. This advertising dip is coming on stronger and faster than the overall economic slowdown. Perhaps that could explain why tech’s been so aggressive in laying off employees lately even while the rest of the labor market seems healthy.
GOOGL’s earnings call could be one occasion where investors hear the latest on ad spending and whether it can revive in 2023. The previous quarter, investors couldn’t find much solace in GOOGL’s results as the tech giant missed Wall Street’s earnings and revenue estimates amid slower-than-expected growth in advertising and Google Cloud revenue. YouTube ad revenue in particular came up short of analysts’ expectations.
MSFT, which reported last week, had a strong quarter in its cloud business, which perhaps bodes well for that aspect of GOOGL’s quarter. However, MSFT’s guidance for the cloud space disappointed investors, so it’ll be interesting to see if GOOGL also sees slower growth ahead.
Scheduled report date: Thursday, February 2, after the close
Expected Q4 EPS (analysts’ consensus): $0.18
Year-ago EPS: $1.39
Expected year-over-year EPS change: –87%
Expected Q4 revenue (analysts’ consensus): $145.4 billion
Year-ago revenue: $137.4 billion
No one has a bigger cloud business than AMZN, putting it in the spotlight Thursday following MSFT’s mixed forecast for that market. As MSFT CEO Satya Nadella said during last week’s earnings call, customers who “accelerated” their digital spend during the pandemic are now starting to “optimize” it. That’s a nice way of saying they’re exercising caution in what appears to be a slowing global economy. That’s bad news for MSFT—and potentially for AMZN.
After reporting Q3 earnings, AMZN saw shares plummet 13%, mostly due to its bearish Q4 forecast. Amazon Web Services (the company’s cloud business) revenue in Q3 came in below the Street’s expectations. The company said it expected total Q4 revenue of between $140 billion and $148 billion, while analysts expected $155.15 billion, according to Refinitiv.
AMZN shares went on to forge a new 52-week low in early January, and the company announced layoffs of 18,000, with Forbes reporting that most of the cuts were expected to be in departments like devices, retail, and human resources. That’s about 6% of the company’s workforce.
To make matters more worrisome, the latest U.S. government data on December Retail Sales disappointed Wall Street, implying a dismal holiday shopping season. We’ll find out more when AMZN reports Thursday on how or whether this had an impact on the retail aspect of its business.
Expected report date: Wednesday, February 15, after the close
Expected Q4 EPS (analysts’ average estimate): $0.85
Year-ago EPS: $0.84
Expected year-over-year EPS change: +1%
Expected Q4 revenue (analysts’ average estimate): $13.43 billion
Year-ago revenue: $12.72 billion
CSCO reports a bit later in February following a November quarterly earnings report that beat the Street’s top- and bottom-line expectations. Data center networking switches saw nice growth of 12% year over year, so we’ll see if CSCO was able to keep up the pace as 2022 closed out. Revenue in CSCO’s collaboration segment, which includes the popular meetings tool WebEx, was a bit of a disappointment last time out. We’ll see if it came back at all in recent months.
Expected report date: Wednesday, February 22, after the close
Expected Q4 EPS (analysts’ average estimate): $0.81
Year-ago EPS: 1.32
Expected year-over-year EPS change: –39%
Expected Q4 revenue (analysts’ average estimate): $6.01 billion
Year-ago revenue: $7.64 billion
About a month ago, NVDA and other chip stocks went on the defense after competitor Micron (MU) posted a soft quarter and said demand for semiconductors had weakened.
That was then; this is now. The semiconductor sector has been among the hottest on Wall Street so far this year, meaning NVDA’s quarter could come under close scrutiny to see if the rally is based on anything more than hope. A weak outlook from Texas Instruments (TXN) last week raised concerns. Shares of NVDA and other chip stocks dipped following the TXN news.
Barclays recently issued a positive report on NVDA, saying the company is well positioned in the Graphics Processing Units (GPU) and artificial intelligence markets. GPU is important for video gaming, among other pursuits.
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