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All Contents © 2018The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| April 18, 2018
The first-quarter earnings season is here, and this one is an important one. That’s because we should see the effects not only of an economy that’s heating up, but the massive corporate tax cuts signed in at the end of 2017.
So far, it mostly has been financial stocks. But the really interesting part of earnings season will come in the latter part of April and early May, when the most important tech stocks’ results start to flow in earnest.
Mike Bailey, director of research for independent investment management and wealth services firm FBB Capital Partners, thinks the next few weeks could prove compelling for most of the names in the technology industry.
“Steady demand for new tech hardware and software coupled with a weaker dollar are driving sales, while lower tax rates and major share repurchases are boosting earnings,” he says, adding, “Generally clean balance sheets mean rising interest rates should have only a modest impact on tech profits during Q1.”
Here’s a closer look at 10 tech stocks that represent arguably the 10 most important quarterly earnings releases from the sector. Every investor likely has a stake in at least a couple of these names. Not to mention, their results also could have an impact on several other companies not on this list.
Data is as of April 17, 2018. Click on ticker-symbol links in each slide for current share prices and more.
Earnings release date: Monday, April 23
Time of day: After the closing bell
Believe it or not, Alphabet (GOOGL, $1,079.36) – the name behind the world’s most popular search engine (Google) and the world’s most popular mobile operating system (Android) – doesn’t always top its earnings estimates.
It does always grow its top line though, on a year-over-year basis, and on an operating basis it almost always beefs up its profits. The earnings “shortfalls” typically come on sky-high expectations driven by analysts who know how successful the company has been in the past, and who expect the organization to continue growing at a similar pace in the present, and the future.
Broadly speaking, it hasn’t been a bad bet. However, how Alphabet manages to beat expectations is changing. Alphabet is looking for other ways to drive revenue outside of online advertising, knowing that digital advertising can’t grow forever as it has in the past. Investors specifically will want to listen for clues about how quickly the company’s cloud and hardware businesses are accelerating to offset the inevitable peak in online advertising demand.
As of the most recent look, analysts collectively expect Google’s parent company to grow first-quarter revenues 23% year-over-year to $30.7 billion, driving profit growth of 21% to $9.35 per share.
Earnings release date: Tuesday, April 24
Contrary to popular belief, Texas Instruments (TXN, $105.39) hasn’t been demoted to a mere maker of calculators and simple consumer electronics. It’s waist-deep into the cutting-edge stuff, too – it simply taken a supporting role, making a bunch of the components other than the popular CPUs you’ll find on most of today’s motherboards.
That still leaves the company vulnerable to a cyclical headwind, however.
UBS analyst Timothy Arcuri recently initiated coverage on TXN, calling it a “Sell” in anticipation of cyclical weakness following an AI-driven surge in demand for newer, more capable computers. Arcuri argues that many of these stocks see their “growth/transformation already priced in.” In the case of Texas Instruments, it may be more than priced in.
Analysts aren’t so sure the lull is here just yet, calling for earnings of $1.11 per share (+14%) for the company’s recently competed first quarter. These same pros also expect 7% improvement in Q1 revenue, to $3.65 billion. The guidance may be more telling of Texas Instruments’ foreseeable future.
However, the fact that the fourth quarter’s earnings miss was TXN’s first in more than a couple years should leave investors prepared for all possibilities.
Earnings release date: Wednesday, April 25
Will any company be more scrutinized this earnings than Facebook (FB, $168.66)?
It’s doubtful, even though the most recent public grilling of CEO Mark Zuckerberg by a Senate committee (for Facebook’s role in the Cambridge Analytica scandal) has practically nothing to do with last quarter’s results.
Still, experts expect another whiz-bang quarter. Analysts model revenue growth of 42% to a total top line of $11.4 billion, which should be enough to drive per-share earnings 31% higher to $1.36 per share.
Just for the record though, Facebook has missed earnings estimates in two of its past four quarterly reports.
The $64,000 question is, of course, what’s next for a company that clearly can’t afford to go on doing business as usual. Facebook likely will lean toward self-regulation, but what does that really mean, and how might it adversely impact future earnings? Jefferies analyst Brent Thill doesn’t think it will be much of a problem. After Zuckerberg was grilled by senators last week, Thill told CNBC, “The primary fear of Wall Street is revenue growth and margins are going to deteriorate materially. We think they will deteriorate but they won’t see the type of downfall that everyone is expecting.” He added, “A lot of what’s been going on has been embedded into the stock.”
The earnings conference call will likely shed plenty of light on the topic.
Qualcomm (QCOM, $55.35), like Texas Instruments, is a tech stock that’s all too easy to forget about. Big mistake. Although Qualcomm has moved out of the spotlight as the smartphone market matured, it’s behind the scenes in myriad ways. Its Snapdragon processor powers the Samsung Galaxy 8 series of mobile devices, as well as the Google Pixel 2. It has a huge Bluetooth presence, and it’s a preferred maker of 4G and 5G modems.
In other words, it’s still plenty relevant.
That’s not to say everything is coming easy for Qualcomm these days. The pros think last quarter’s sales fell a little more than 13%, to $5.2 billion. That sizeable revenue lull will almost cut year-over-year earnings in half, from $1.34 per share to only 70 cents.
This isn’t just about the here and now, though. Investors are looking for proof that Apple won’t replace Qualcomm chips with Intel technologies in future iPhones. More than that, QCOM investors are handicapping with a buyout or privatization in mind; former Qualcomm chairman Paul Jacobs has approached several companies about buying out the chipmaker.
That rhetoric may mean more to the market than Qualcomm’s quarterly numbers.
Earnings release date: Thursday, April 26
E-commerce powerhouse Amazon.com (AMZN, $1,503.83) is, to sum it up in a single word, a juggernaut. Between forever finding ways to entice consumers into making purchases while also expanding its cloud computing arm at the just-perfect time, sales growth has been through the roof.
That didn’t change last quarter – or at least, the pros don’t believe that changed. Wall Street analysts are calling for revenue growth of almost 40% to $49.9 billion. The consensus earnings estimate of $1.25 per share is actually less than the year-ago bottom line of $1.48.
But don’t jump to the wrong conclusion. Amazon usually tops its earnings outlooks, and it tends to trounce them when it beats them.
Intel (INTC, $53.54) may have once been the undisputed king of computer technologies, but for years now, its competitors have slowly but surely taken a toll. There’s no telling when, or even if, Intel might rekindle its glory days.
That’s how Linley Gwennap, lead analyst for communications-semiconductor consulting and analysis firm Linley Group, sees it. The microchip expert points to competing computer processor manufacturers like Taiwan Semiconductor (TSM) and Samsung Electronics, pointing out how they’ve all but closed the gap on the technical advantages of Intel’s chips. Gwenapp says Taiwan Semiconductor’s 7-nanometer technology “appears similar to Intel’s 10nm, within a fraction of a node,” adding that “the three leading foundries, which serve all of Intel’s major competitors, (will be) on the same level as the x86 giant.”
It’s a microcosm of a much bigger picture suggesting that Intel simply didn’t remain competitive enough as the market changed.
On April 26, investors will be looking beyond a comparison to analyst estimates for a profit of 72 cents per share and sales of $15 billion. They’re going to be looking for evidence that the company’s technologies can turn heads again the way it used to.
Today’s Microsoft (MSFT, $96.07) isn’t your father’s Microsoft. The Microsoft of yesteryear was primarily about selling its Windows operating system, with its Office productivity suite’s sales being a close-second priority. The business model was one of updating and upgrading previous versions of its software, starting the revenue cycle all over again.
The new business model is one of recurring and repeat revenue, where users “rent” access to its Office productivity platform, and where corporate cloud customers rather than consumers are driving revenue. CEO Satya Nadella even recently broke the legacy Windows division into separate parts amid a significant reorganization that clearly illustrated this shift to a new Microsoft era.
Investors are getting comfortable with this shift, though at times it feels a little foreign for Microsoft to work on things like artificial intelligence or the Internet of Things.
Regardless, the new mindset and model is working, and should continue to work for the foreseeable future. GBH Insights’ chief strategy officer Daniel Ives said of the prior quarter’s impressive report, “Microsoft continues to be a pillar of strength on the cloud front and the Azure growth story is still in the early innings.”
The new mission is securing recurring revenue, though possibly at the expense of the occasionally explosive growth. Knowing this puts the upcoming quarterly report in perspective. The new model may be a lower-margin one than we’ve seen in the past, but there’s a lot to be said for reliable, ever-rising free cash flow. Analysts are calling for quarterly revenue of $25.8 billion and per-share profits of 85 cents. Both are up a fair amount from the year-ago comps.
Earnings release date: Tuesday, May 1
Time of day: Before the opening bell
The broad technology sector has been on a roll of late, but not every stock has rolled with it. Disk drive maker and data-back solutions provider Seagate Technology (STX, $61.89) has struggled since 2013, trapped between competitors and a computing environment that relies less and less on hardware (and more on the cloud). Its trailing-12 month revenue of $10.6 billion is well below its peak 12-month total of $16.3 billion as of the end of 2012.
However, the company might be on the verge of turning things around.
Analysts collectively think Seagate earned $1.31 per share in Q1, versus only $1.10 per share in the year-ago quarter. Admittedly, sales estimates are a bit more tepid, with the pros expecting $2.74 billion versus the year-earlier comparison of $2.67 billion.
Investors will demand more sooner or later. But a handful of analysts are seeing a light at the end of the tunnel. Morgan Stanley analyst Katy Huberty recently upgraded STX to an Overweight rating, explaining, “We believe accelerating IT budget and data storage growth in the Data Era are underappreciated by investors.” She added, “Exponential data growth in the next computing cycle, share gains in near-line drives, and low inventory levels make us more constructive” on the company.
That may not show up in the numbers slated for release in early May, but it certainly gives investors something to think about while they digest the report.
Not only is Apple (AAPL, $178.24) the world’s biggest and most profitable company, but it’s also the world’s most-watched outfit. And its early May earnings report likely will be the most watched report this earnings season.
There’s plenty for current and would-be shareholders to think about. FBB Capital Partners’ Bailey says, “AAPL shares may remain range-bound as the company reports Q1 earnings since smart phone sales have cooled. Still, investors may cheer AAPL’s massive return of cash in the form of stock buybacks as well as rising sales of Apple Music and Apple Watch that are reducing the boom-and-bust cycle of new iPhones.”
In the previously reported quarter, sales of the iPhone (by unit) fell 1%, while services – such as the aforementioned Apple Music, and apps – saw 18% year-over-year-growth. The iPhone lull may or may not be indicative of market saturation of phones in its price range, but either way, Apple is looking for a way to become less reliant on ever-volatile iPhone sales. It’s the paradigm shift that will hurt or help Apple the most come May 1.
The pros currently expect Apple to report a per-share profit of $2.70 (+29% year-over-year) for the recently completed quarter, on sales of $61.2 billion (+16%).
Earnings release date: Thursday, May 10
Last but not least, CPU and GPU maker Nvidia (NVDA, $237.54) will log its earnings report after the closing bell rings on May 10. Analysts expect big gains on both the top line ($2.9 billion) and the bottom line ($1.45 per share).
It’s a tricky scenario for interested investors. While most everyone understands that blockchain-driven demand for graphics-processing cards isn’t a huge part of Nvidia’s revenue mix, it has been a huge part of the reason NVDA shares have mustered a roughly 130% gain over the course of the past 12 months. If investors detect even a hint that new ASIC technology from Bitmain is a cost-effective alternative to Nvidia’s GPUs for the purpose of mining cryptocurrencies, the bullish sentiment surrounding the stock could take a nosedive. The stock itself likely would follow that lead.
The frustrating irony is, Nvidia is firing on all cylinders – particularly when it comes to supplying artificial intelligence developers with the hardware they need to process all the data they gather. During the fourth quarter of last year, 20% of the company’s revenue stemmed from AI-related purchases. A year earlier, artificial intelligence accounted for only 13% of Nvidia’s sales.
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