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    Opinion: Tech earnings are about to dive, and there’s no life preserver in sight – MarketWatch

    Now, a slow release of air from a balloon would be a welcome relief from the sonic boom of tech stocks tanking and earnings warnings piling up. Tech companies are expected to show large earnings declines after more than two years of gains during the COVID-19 pandemic, as inflation and fears of an impending recession lead consumers and companies to cut back.

    After a boom in personal-computer sales went bust, the overall IT sector is projected to see earnings fall nearly 5%, thanks to the semiconductor industry. After swinging from a shortage to a glut, chip makers are expected to see earnings plunge more than 15%. With companies looking to cut advertising spending, the online-ad powerhouses are projected to see profit fall more than 20%, and the e-commerce companies that consumers depended on during lockdowns are forecast to show an earnings decline of more than 25%.

    Even areas expected to show growth are likely to see anemic advances compared with past performance, as software growth is modeled for an earnings increase of less than 2%.

    Brendan Connaughton, founder and managing partner of Catalyst Private Wealth, believes tech executives are going to use this quarter and the next as “kitchen sink” quarters, where they can throw in every possible write-down or excuse, and then try to beat their own lowered expectations.

    Forecasts for the holiday season aren’t expected to be much better — tech investors are girding for several weeks of cautionary statements, missed numbers and downright pessimism, as tech executives try to get rid of all the company baggage before next year.

    “Leadership is going to be very, very conservative,” said Connaughton. “I think forward guidance is going to be very ugly.”

    Ugly comparisons with a year ago

    That will lead to some ugly numbers in the weeks ahead, and with good reason. Compared with a year ago, when the third quarter was the third highest earnings growth quarter of the pandemic boom, this year’s September quarter is looking grim. FactSet estimates indicate that blended earnings for the overall information technology sector — which includes semiconductors, hardware, and software, including tech giant Apple Inc.
    AAPL,
    -0.33%

    — will be down 4.6%, compared with growth of 38% a year ago.

    Revenue, on the other hand, will still grow but only fractionally. The IT sector is forecast to see overall blended revenue growth of 4.7%, compared with 19.8% growth a year ago. Surprisingly, tech is still faring better than the overall S&P 500, at least on the earnings side. FactSet now indicates the overall S&P 500
    SPX,
    -0.80%

    will show blended earnings growth of 1.2% in the third quarter, which would mark the lowest year-over-year earnings growth since the third quarter of 2020, and 8.7% revenue growth.

    Those declines may seem small compared with what is expected from the biggest names on the internet — Alphabet Inc.
    GOOG,
    +0.24%

    GOOGL,
    +0.34%
    ,
    Meta Platforms Inc.
    META,
    -1.28%
    ,
    Twitter Inc.
    TWTR,
    +1.18%

    and Match Group Inc.
    MTCH,
    -4.54%
    .
    These companies comprise the interactive services segment of the communications services sector and analysts expect their third-quarter earnings to fall 20.4%, and their blended revenue to grow 6.4%. A year ago, those companies as a group saw their earnings soar 43.3%, fueled mostly by gains at Alphabet, while revenue surged 39.8%.

    The current earnings season will be dragged down by both the overall advertising environment and Meta’s results, which are expected to show increased competition from ByteDance’s TikTok, lower advertising revenue from its Reels short-form video offering, and talk of cost cutting.

    “Meta stock is down 62.1% year-to-date and around 25% since the 2Q22 print, as the ad biz is slowing amid various macro headwinds, iOS privacy changes, rising competition, and shifting user engagement to Reels, which currently monetizes at a lower rate,” wrote John Blackledge, a Cowen & Co. analyst, in a note on Thursday, cutting estimates. The consensus on Wall Street is for Meta revenue to fall 4.8%.

    And while Alphabet’s Google is expected to see revenue growth in the quarter, that single-digit growth rate of 9% is anticipated because of the ad climate, and competition to YouTube from TikTok. Last quarter, YouTube’s revenue growth decelerated, due to competition from TikTok and other video-streaming rivals.

    Chips and hardware hit by drop in PC demand

    While internet companies will also talk about the greater macroeconomic environment, including the impact of global supply chain issues on online advertising, the sector seeing the biggest impact from supply chain woes is the semiconductor industry.

    Supply chain woes, which have been plaguing the industry for a few years, are not the biggest issue right now for chip companies. The sudden drop in demand for personal computers, after a huge pandemic boom for remote work and school, is hurting both PC makers and their suppliers.

    In the past month, Micron Technology Inc.
    MU,
    +1.26%
    ,
    Nvidia Corp.
    NVDA,
    +1.19%

    and Advanced Micro Devices Inc.
    AMD,
    +0.94%

    have all warned or lowered their revenue forecasts, citing too much inventory and the sudden drop in demand in the PC business. Last week, Bloomberg reported that chip giant Intel Corp.
    INTC,
    +0.31%

    is planning a head count reduction, and will likely lay off thousands of workers by the end of the month, around the same time it’s expected to announce its results.

    “It seems end demand has likely deteriorated markedly in recent weeks, and end customers appear to be aggressively draining inventory,” wrote Stacy Rasgon, a Bernstein Research analyst in a recent note after AMD lowered its outlook.

    Don’t miss: 5 things to track and 5 action points to take this earnings season

    Both semiconductors and the hardware segments are spoiling the momentum in the rest of the IT sector. Estimates compiled by FactSet indicate that the semiconductor industry is forecast to see overall earnings tumble 15.7%, compared with the monstrous profit growth of 57.7% a year ago. Sales are predicted to grow 4.7% in the third quarter, a far cry from growth of 24.7% in the year-ago quarter. The biggest contributors to the drop in earnings growth are expected to be Intel, Nvidia, and Applied Materials
    AMAT,
    +1.81%
    ,
    with Intel forecast to see a nearly 80% plunge in earnings.

    Hardware companies are faring even worse, as storage makers and PC makers, with the exception of Apple Inc.
    AAPL,
    -0.33%
    ,
    are expected to see both earnings and revenue tumble. HP Inc.
    HPQ,
    +0.31%
    ,
    which doesn’t report until Nov. 22, is expected to see revenue fall nearly 12%. And storage makers Seagate Technology
    STX,
    +0.34%

    and Western Digital Corp.
    WDC,
    +0.33%
    ,
    with revenue forecast to fall 32.5% and 27.9% respectively, have both raised new fears about a slowing demand for cloud computing, one that this column also recently warned about.

    “Both Seagate and Western Digital reported they were both seeing more cautious buying behavior from some of their cloud and enterprise customers,” said Mark Miller, a Benchmark Research analyst. “We see this trend expanding.”

    Software and e-commerce hit by higher costs

    For now, software is expected to be among the few highlights of the quarter, with a prediction of rather anemic earnings growth of around 1.9%, and revenue growth of 11.8%. Microsoft
    MSFT,
    -0.14%
    ,
    with its big PC business and heavy exposure to currency fluctuations as the dollar strengthens in Europe, is forecast to see revenue growth of around 9.9%, while its Windows business slows, and its Azure cloud business continues to grow, albeit it at a slower rate of around 44%.

    “We expect Microsoft to report [fiscal] Q1 revenue largely in line with our $49.8 billion (up 10% year over year, up 16% in constant currency), with expected Azure and O[ffice]365 upside, offset by PC/Windows weakness,” said BofA Securities analyst Brad Sills, in a note.

    E-commerce companies are still seeing sales grow, but those slower growth rates started last year, after the end of lockdowns around the world brought consumers back into bricks-and-mortar stores. Costs for labor, transport, and goods are imploding, so earnings are falling sharply. In the consumer discretionary/internet retail sector, earnings are expected to fall 25.6%, while revenue is forecast to grow 14.7%, compared with 14.8% revenue growth in the year-ago quarter.

    Amazon.com Inc.
    AMZN,
    +0.16%

    is on target to see total revenue growth of 15.7%, with bigger growth coming from its AWS cloud computing business, of around 31%. That total revenue growth, investors will recall, is a step down from when net sales soared 37% in the third quarter of 2020, fueled by pandemic online shopping.

    Evercore ISI analysts note downside risk to Amazon’s operating estimates, since the e-commerce giant raised hourly raises for warehouse and delivery workers, and is facing high shipping costs, gas prices and persistent supply chain issues. FactSet indicates Amazon earnings are estimated to drop 27.7%.

    Investors are going to see a huge mixed bag of issues this quarter, but they shouldn’t expect things to improve too quickly either. As Connaughton tells his clients, this can be a good time to look at getting some deals in the downtrodden sector, when looking at their price/earnings ratios.

    “Everyone wants to make money tomorrow but if you can look past that, there are incredible values in tech,” he said. For example, he said, “If I am betting long term on Amazon, now is a good time to buy.”

    With earnings projected to be rough through the holiday shopping season and as the risk of recession looms in 2023, it will be tough to make money and easy to misjudge any buying opportunities.

    This content was originally published here.

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