Stock of the week: Can earnings season save tech
It’s been a rough ride for US tech stocks so far this year, and the Nasdaq 100 is now deep into correction territory. With the first tech companies of the season reporting earnings this week, the market will be busy analysing what the future holds for tech. If Netflix is any guide to the tech sector, its Q4 subscription growth was below expectations when it reported results last week and this sent its share price down some 20%, which suggests that if tech doesn’t deliver the goods this earnings season then it could get punished by the market. Our view is that the biggest, established tech names will be able to outperform against the smaller end of the tech spectrum in the long term. This is because the likes of Microsoft, Apple and Google have a good track record of producing strong profits, which should help them weather higher levels of inflation and supply disruption. However, we need to hear from the corporates themselves to see if this is the case. Also worth noting, is that the start of tech earnings season coincides with the first Federal Reserve meeting of the year, which is another risk factor when trading the tech names this week.
Below, we take a look at five tech companies that are reporting Q4 earnings this week.
The first of the tech giants to report earnings this week is Microsoft, who reports results after the market closes on Tuesday. The market expects 13% earnings growth for 2021. It is also worth remembering that Microsoft reported stellar earnings growth for Q3 2021, with earnings rising a whopping 22%. Thus, anything weaker than 13% could lead to fears over a slowdown. We also think that the market will be looking out for any updates on Microsoft’s $69bn acquisition of video game publisher, Activision Blizzard. This is a fast-growing segment of the tech world, and analysts will want to know the percentage of revenues that Microsoft executives think will come from Activision Blizzard in the years to come. It will be also be worth watching out for any demand impact from Microsoft Office’s price hike that comes into effect from March 1st. A company with pricing power in this environment could be cheered by the market. Lastly, revenue growth for its cloud business, Azure, is crucial to its service revenues. Overall, Microsoft is one of the tech giants that we think could outperform in a relative value tech trade due to its pricing power, size and scale and diversified business units. It is worth noting, that Microsoft’s shares rise the day after an earnings report 60% of the time, according to analysis from Bespoke. However, technical signals point to further downside for this stock, so it could take an epic earnings beat to change that momentum.
The chip maker will report earnings after the market closes on Wednesday. The market does not expect to hear good news, analysts are expecting to see a 40% drop in earnings compared to a year earlier. This is a big loss; however, its share price remains at a more favourable valuation than other tech companies because it has been in a downtrend since April. After outperforming the broader tech sector at the start of the year, its share price has succumbed to the overall tech sell off and is down some 8% since the 12th January.
The market is looking at costs when it comes to Intel’s earnings for Q4. The company is in a transition period, it is moving to a model of producing more chips for its own brand name and for competitors, however, it still faces stiff competition from the likes of ARM and the enterprise chip segment. It announced recently that it would open a chip making plant in Ohio at a cost of $20bn, investors will want to know if it is worth it. Over the last two years, Intel’s shares have plunged after quarterly earnings figures, and if momentum remains to the downside for the tech sector, we expect the same to happen again.
Elon Musk’s EV maker is also reporting earnings after the bell on Wednesday. The market is expecting some big numbers for Tesla, with annual earnings tripling compared to a year earlier. Cast your mind back to Q3 earnings and Tesla’s share price surged after it reported record revenue and profits for Q3 21. Tesla attracts some EV evangelists, so Tesla earnings are never just about the numbers, they are also about latest product updates, which is what Elon Musk has promised to deliver on this earnings call. No doubt, Musk has a few sweeteners up his sleeve, but will that be enough to turn the ride on the Tesla share price, which has fallen from a high above $1,200 at the end of 2021, to $943 today? The share price took another beating on Friday, dropping more than 5%, as it becomes everyone’s favourite profitable tech company to short.
The market will be looking for updates on driverless technology, the customer delivery date for the Tesla truck and the new Roadster, along with updates on new Tesla factories in Austin and Berlin. Supply chain issues and an update on Tesla’s bitcoin and other cryptocurrency holdings is also expected, especially after the Bitcoin price has plunged below $35,000 and is down more than 7% at the start of this week. In terms of Tesla’s share price performance after earnings reports, it can be very erratic. If Musk does not impress the market with his latest updates, expect further downside.
The retail trading app is expected to release earnings on Thursday after the market closes. We are adding in this company to highlight how it could perform compared to some of the tech big-hitters like Apple and Microsoft. The market is expecting the company to make another loss for last quarter, and in this environment, tech companies that can’t turn a profit are seriously out of fashion. The market will want to hear forward guidance about crypto trading, especially after the sharp drop in the crypto space recently. Also, the market wants updates on how its equities trading business is growing and how projects such as client crypto wallets and a fully funded securities lending business is going. Unless we see some spectacularly good results, which we doubt, we do not think that Robinhood’s share price will turn around on the back of these results, its share price has lost more than 80% since peaking in August. The risky nature of this app-based fin-tech business is not in vogue at the moment, and we think that the stock price could come under more pressure.
We are leaving the best to last, in our view. The retail tech giant is reporting earnings at 1630 ET on Thursday, and the market is expecting 12% earnings growth with some revenue growth also expected. This could be what a “bad” quarter looks like for Apple after some tremendous earnings figures in recent years. Christmas trading is expected to be robust, and it could report revenues that are likely to beat Q4 2020, when revenues were $114bn, a quarterly record. However, in Q3, Apple said that it expected to lose out on $6bn in sales in Q4, due to parts shortages such as microchips, along with the global supply chain crisis causing delivery problems. Will this impact 2022 sales, and the pipeline of new or updated products available? If the answer is yes, then we could see a further sell off in Apple’s share price in the short term. Its share price is down by 11% so far this year, a disappointing outlook from Apple could spook the market and lead to further losses for the broader tech sector in the short term. Added to this, Apple’s stock price does not have a good track record for rallying after an earnings report and has fallen after earnings calls for 5-straight quarters, according to Bespoke. Overall, we think Apple will weather the tech sell off better than others in the long term, even if storm clouds are gathering over this week’s earnings report.