Halloween always seems to coincide with technology earnings season, so it’s not surprising that the latest round of corporate reports could be a little scary. The world’s largest microchip-maker Intel will kick things off after the U.S. stock market closes on Tuesday. Over the next two weeks, America’s top public tech companies will report their latest performance to shareholders.
Investors are slightly spooked after a month of the U.S. stock market moving sideways. With China’s growth rate slowing and Europe in a near-recession, the global economy seems almost like a Zombie. Expectations are so downcast that many investors seem like they’re in Doomsday Prepper-mode, hunkering down until after the election when there might be more certainty about which political party will run the U.S. government. A weakening U.S. dollar will help America’s largest tech companies on exports, but not enough to offset sluggish consumer spending in Europe, China, and elsewhere in Asia.
In an indication of investor pessimism, Wall Street’s consensus view is that S&P 500 earnings will decline 3% this quarter, according to data cited by Reuters. After Intel reports Tuesday, investors will be looking forward to Google’s report on Thursday. The performance of these two companies, both considered tech bellwethers, will set the tone for the rest of earnings season, including Apple’s highly anticipated report next week.
In an ominous sign of things to come, Intel last month reduced its third-quarter revenue guidance citing “a weak macro environment, customers reducing inventory in the supply chain, softness in the enterprise PC market, and slowing emerging market demand,” as Baird Equity Research analyst Tristan Gerra observed in a note to clients. David Abate, a wealth adviser with Strategic Wealth Partners told Reuters than he’s skeptical about Intel’s earnings, given that many consumers seem to be sitting on the sidelines of the electronics market. “There’s diminishing demand in the PC market and we are concerned about (the company’s) top-line growth,” Abate told the wire service. (“Top-line” refers to overall sales, versus bottom line, which is profit.) Intel shares are down over 10% so far this year.
Wall Street sentiment is somewhat more optimistic about Google, but investors should fasten their seat-belts because this is the first full quarter the tech giant will be reporting earnings after it closed the $12.5 billion acquisition of Motorola Mobility, and the results could be “messy,” according to Citigroup’s Mark Mahaney. Nevertheless, Mahaney emphasized in a note to clients that he views Google as “well positioned against several of consumer Internet’s biggest trends (Mobile, The Migration Of TV Ad Budgets Online, Local, and Cloud Computing.)”
Macquarie’s Ben Schachter also expressed confidence in Google. “Our thesis remains simple: people are using the Internet more often, for more purposes, and on more devices,” Schachter wrote to his clients. “Google should continue to benefit as the proliferation of smartphones and tablets drive mobile Internet usage higher.” Susquehanna’s Herman Leung said Google stock has “benefited from a shift from the new Internet models back to a focus on established models, such as Google, with a strong track record.”
Given the global macroeconomic weakness, investors would be advised to be selective about tech companies, and in a climate like this, many market players will seek safety with the most reliable performers. Brian Fitzgerald at Jefferies says he is “most optimistic” about Google, AOL, and Amazon, given encouraging Web traffic trends and Amazon’s seemingly inexorable march toward total e-commerce domination. (That’s me, not Fitz.) On the other side of the ledger, Fitzgerald says he’s cautious about Netflix, Yahoo!, and Groupon, each of which faces more immediate challenges.
Fitzgerald emphasized that mobile will be a “key driver” across the tech sector — with Google, eBay, and LinkedIn particularly well-positioned — as consumers increasingly shift their Internet activity off the desktop and onto smartphones and tablets.
Wall Street will be particularly interested in Yahoo!’s earnings call next Monday, because it will be the company’s first full report since former Google executive Marissa Mayer assumed command of the purple-hued Internet pioneer. Mayer, who gave birth to her first child earlier this month and returned to the office full-time this week, scored a nice coup Monday by snaring one of Google’s top sales executives, Henrique De Castro, to be her COO, she announced on Twitter Monday.
The two biggest unknowns are Facebook and Apple, which report earnings next Tuesday and Thursday, respectively. Facebook is coming off a tumultuous quarter following the company’s controversial IPO and subsequent 40% stock slide. After so much hype, Facebook has become an unfortunate example of a “show-me” stock. Investors will want to see tangible top-line revenue gains and a decent earnings forecast if Facebook’s stock price is going to get up off the floor.
As for Apple, this stock has been hammered lately, down more than 8% in the last month. Nervous Apple investors should take this in stride, given that the Cupertino, Calif.-based cash machine is still up over 50% year-to-date.
The key watchword this technology earnings season will be “quality” as investors look to the most reliable tech stocks for safety. Once again, there is very little margin for error, given global macroeconomic weakness and U.S. political uncertainty. Intel will set the tone Tuesday, and if the company delivers a disappointing report, it could augur a long couple of weeks for the sector.