The way Info Tech stocks outperformed the market over the last three months, investors might be expecting the sector’s Q1
earnings growth to be sky high. That won’t necessarily be the case, however, if analysts have things pegged right.
Info Tech firms, on average, could see a slight-to-moderate year-over-year earnings decline, depending on which research firm
you consult. Many reasons come to mind, including slowing sales in parts of the semiconductor chip sub-sector, a bit slower (though
still strong) growth in cloud computing amid increasing competition, and weaker iPhone performance from Apple Inc.
(NASDAQ: AAPL).
Info Tech firms also enter Q1 earnings season facing some of the same issues as other S&P 500 sectors, including tough
comparisons to year-ago performance, as well as a stronger dollar and a declining boost from the late 2017 U.S. tax reform that
gave many companies a big spark in early 2018.
A couple of companies reporting in March set the stage. Oracle and HP Inc (NYSE: HPQ) appeared to disappoint investors, at least judging from their stocks’ reaction
to earnings and guidance from the two firms. The Info Tech reporting seasons kicks off in a major way the week of April 22 (see
more below).
China Exposure Could Be Critical
Like a lot of sectors, Info Tech has a wide exposure to the Chinese market, so it wouldn’t be surprising if some companies saw
an impact from the U.S./China trade battle and China’s slowing economic growth in Q1. It might be interesting to hear what some key
executives like Tim Cook of AAPL and Satya Nadella of Microsoft have to say in their conference calls about any impact the trade
situation is having on sales and projections.
Apple—still the elephant in the room when it comes to Info Tech—already shook things up ahead of earnings season with reports
that the company cut iPhone prices in China as it faces fierce competition and falling demand for its iconic product there. Many
analysts see AAPL transitioning to a more service-oriented model, and the company’s announcement late last month about new
streaming products like Apple TV+ might have helped shares. Apple has been one of Wall Street’s better performers in Q1, but shares
are still a long way from the all-time highs posted last fall.
The venerable AAPL wasn’t the only Info Tech company whose shares were living large in Q1 after a disappointing 2018. It’s
shades of 2017 so far this year, as Info Tech led all sectors with blistering 22% gains through late last week, compared to around
14% for the S&P 500 (SPX). The Fed’s newfound dovish stance after a series of 2017 and 2018 rate hikes appears to have
investors feeling optimistic about the stock market again, and when they feel that way they often gravitate toward Info
Tech.
Much of the sector’s strong showing in Q1 probably reflected a market that’s looking ahead, not behind. The stock market
sometimes takes on the role of being a leading indicator, skating toward where investors think the puck is going to be rather than
where it is now. There’s growing hope for earnings improvement in Info Tech and other sectors throughout 2019, and U.S. economic
growth is also generally expected to improve as the year continues after a tepid Q1 performance, according to many analysts.
The question now isn’t so much whether investors are enthusiastic or not about Tech, but more about whether demand for the
industry’s widest-selling products can continue to justify the booming sector performance in Q2 and beyond. That likely means
earnings season approaches with high investor expectations for Info Tech company guidance, meaning it’s possible companies that
disappoint with their outlooks could get punished in the market.
Chips Take New Leadership Role
Two years ago, the so-called “FAANG” stocks, (which include AAPL), Alphabet Inc (NASDAQ: GOOG) and several other Internet names, led Info Tech to better than 30%
gains for 2017. However, most of the FAANGs got split off from Info Tech into the new Communication Services sector several
quarters ago, so when people talk Tech now, it’s not about the FAANGs. Increasingly, the faces of Info Tech tend to be chip makers
like Intel Corporation (NASDAQ: INTC) and
Micron Technology, Inc. (NASDAQ: MU),
along with cloud-computing giants like Microsoft Corporation (NASDAQ: MSFT) and Oracle Corporation (NYSE: ORCL).
It looks like chips might have taken up FAANG’s former position as a market bellwether, providing momentum across the Info Tech
sector and even into the rest of the S&P 500 when they look healthy, but spreading softness when they hit a road bump. Last
fall, chip companies started warning of slower product growth, and that appeared to spook many investors. While there were many
reasons for the Q4 Info Tech plunge, worries about declining chip demand can’t be overlooked.
As Investor’s Business Daily noted in a recent article, semiconductors provide the ingredient technologies for personal
computers, tablets, smartphones and other gadgets. They run communications networks and the Internet, and are underpinning
so-called “smart” technology improvements to televisions, home appliances, automobiles and other devices.
Trends like cloud computing, 5G wireless networks and artificial intelligence also depend on semiconductor chips. So arguably,
if there’s a hitch in the semiconductor market, it could be a “canary in the coal mine” for much broader problems that go way
beyond the semiconductor industry itself.
Semiconductor stocks are up about 27% year-to-date, outpacing the Tech sector as a whole. It appears the market is hoping for a
big pick-up in earnings growth and order demand for the chip sector of Info Tech in Q1, Briefing.com noted, adding that investors
are likely to closely watch chip makers’ guidance to see if CEOs confirm the market’s assumptions that a cyclical bottom is taking
shape.
Current industry analysis suggests 2% to 3% growth in revenue this year and next for the chip industry. Memory chip sales are on
pace to decline this year, while other segments should offset the shortfall, Investor’s Business Daily said.
Q1 Earnings Season
On the whole, Q1 earnings for the Info Tech sector are expected to fall 1.1%, according to research firm CFRA. That makes Info
Tech one of seven sectors where CFRA predicts a negative overall earnings performance in the quarter.
FactSet is even more negative, expecting a 10.6% drop in Q1 Info Tech earnings performance, a much worse outcome than the 3%
decline for the sector it had predicted back in late December. FactSet expects Info Tech revenue to fall 1% in Q1.
It’s quite a change from 2018, when Info Tech earnings rose 23.9%, and from Q4, when they rose nearly 12%. For the full year of
2019, CFRA sees the sector’s earnings coming in flat, compared to a 2.2% projected rise for the full spectrum of S&P 500
earnings.
However, as Briefing.com notes, a kind of broad-stroke thing to keep in mind with Tech is while earnings growth overall doesn’t
look so swell for the sector, many individual companies have stronger earnings growth potential than in other blue chip areas.
Arguably, the onus on companies whose shares had huge runs in Q1 is to live up to expectations that they can deliver even in a
slower economy.
Upcoming Earnings Dates
The Info Tech earnings season begins in earnest the week of April 22, when some of the companies Briefing.com projects to report
include United Technologies Corporation (NYSE: UTX) and Texas Instruments Incorporated (NASDAQ: TXN) on April 23. Intel Corporation (NASDAQ:
INTC) and Microsoft Corporation (NASDAQ:
MSFT) are expected to report the same week.
Apple says it will be presenting its fiscal Q2 results on Tuesday, April 30, after the close. Some of the key chip makers
won’t be reporting until mid-May or June.
Image sourced from Pixabay
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