Earnings preview: Will profits get the tech market rally back on track?


Quarterly earnings season begins this coming week, and the question for technology companies is: How high is up?

Despite two weeks of modestly declining share prices in April, technology shares are still up an average of 10 percent in 2017, compared with 4 percent for the overall market. Prior to the latest skid, Apple Inc. (which reports May 2) was up 22 percent for the quarter, Facebook Inc. (May 3) climbed 21 percent and Amazon.com Inc. (April 27) hit a peak of 20 percent above its year-end close.

Even stocks of legacy technology companies have shown resilience. SAP SE (April 25) was up 15 percent in the first quarter, IBM Corp. (April 18) rose 9 percent, Google Inc. parent Alphabet Inc. (April 27) climbed 8 percent and Microsoft Corp. (April 27) was up 5 percent. Among the information technology giants who will report over the next two weeks, only Intel Corp. (April 27) and Qualcomm Inc. (April 19) have declined.

Why the surge, and can it last? We’ll start to get an answer to the second question late Monday, when Netflix Inc. reports, and on the enterprise tech front Tuesday afternoon when IBM weighs in. Sales at Netflix are expected to be up 35 percent to $2.64 billion and the company said it expects to add 5.2 million international subscribers. If Netflix misses on either of those numbers, and especially if IBM fails to impress, the punishment the market metes out could set the tone for the rest of the earnings season.

Experts say the recent run-up has been fueled by investors who are seeking growth now that hopes have dimmed for near-term big tax cuts or infrastructure spending by the new administration. That prospect had driven price/earnings multiples for some companies into the stratosphere. Amazon’s P/E ratio, for instance, is 180. But with Gartner having recently slashed its global forecasts for personal computer shipments and overall IT spending, there seems to be little good news to keep the market buoyant.

Looking ahead

One thing likely will emerge from the first-quarter performance: Leaders in mobility and the cloud are in favor. “The ongoing movement toward cloud services is not only being fueled by the mainstream acceptance of these on-demand alternatives, but also by the continued economic uncertainties facing companies in an increasingly volatile global environment,” said Jeff Kaplan, managing director at THINKstrategies Inc., a cloud consulting firm.

Ralph Finos, an analyst at Wikibon, owned by the same company as SiliconANGLE, expects Amazon to report $3.74 billion in quarterly revenue from its Amazon Web Services cloud computing unit, up 46 percent from the same quarter last year. Analysts are estimating overall quarterly earnings per share will be about $1.13. In recent quarters, virtually all of Amazon’s operating profits have come from AWS.

Finos thinks No. 2 cloud player Microsoft will grow its Intelligent Cloud business about 9 percent to $6.45 billion and the Azure infrastructure-as a service business between 90 and 100 percent. In handily beating sales and earnings estimates in the most recent quarter, Microsoft reported 95 percent growth in its Azure business, with Office 365 successfully baiting the hook for many enterprises to move cloudward. Analysts are looking for a 69-cent EPS in the quarter.

Cloud computing remains a tiny portion of revenues for Alphabet despite Google’s accelerating focus on new cloud services and infrastructure spending since at least 2015. Investors will certainly have questions about its cloud operation, mostly how much Google is spending to build it up. But shares no doubt will turn more on how its massive advertising business performs. Analyst are looking for profits of $7.40 a share on a 20 percent jump in revenues, to $24.2 billion.

IBM continues to frustrate investors who see the company’s strategy hitting most of the right notes but revenue still falling for 19 straight quarters. “I’m still waiting for some sign of an inflection point,” when growth markets like analytics and cloud will make up for declines in IBM’s traditional hardware and software businesses, Finos said. He’s expecting the string of declines to continue, however, with IBM’s quarterly revenue falling 2 percent to $17.9 billion, below the analyst consensus of $18.4 billion.

The public cloud business should grow 57 percent, to $2.1 billion, and overall cloud revenue should surge 35 percent, to $3.5 billion, Finos said. But that would still have IBM falling further behind Amazon and Microsoft.

The big question for IBM is whether its can charge up its Watson-led Cognitive Solution business, which Finos expects will grow a scant 2 percent in the quarter. “That needs be higher for them to move the needle,” he said.

Patrick Moorhead, president and principal analyst at Moorhead Insights & Strategy will be listening for news of improvements in IBM hardware sales, especially its Power line of chips, which Google endorsed last year. “Are there any indications that Google is actually using Power9 processors?” Moorhead asked. Echoing Finos, he added, “IBM needs to drive strategic imperatives at a greater rate than traditional enterprise business.”

In transition

Intel is in transition as it sheds no-growth business such as security and places big bets on nascent markets such as autonomous vehicles. Investor expectations are modest as a result. Analysts expect Intel to report quarterly revenues of $14.81 billion, up about 7 percent.

Moorhead said he’ll be looking for statements about how Intel is coping with new competition from rival Advanced Micro Devices Inc. He’ll also be listening for news of whether a modest revival in PC sales is trickling down to the bottom line and when investors should expect to see results of recently announced artificial intelligence initiatives.

As a dominant maker of chips for mobile devices, Qualcomm Inc. is another bellwether for tech, but it’s embroiled in a back-and-forth court battle with Apple over claims by the iPhone maker that Qualcomm asked for excessive royalty payments for its cellular technologies. Qualcomm has lost almost $14 billion in market value as its shares dropped since the January Apple lawsuit filing.

The case could play out over months or years, and Qualcomm Chief Executive Steve Mollenkopf said in January that the suit wasn’t changing its own estimates for its second fiscal quarter. But the billions of dollars at stake in the case could make investors less forgiving of any earnings glitches. Analysts on average expect a $1.20-a-share profit, in the middle of Qualcomm’s own estimates, on revenues of $5.9 billion, up 7 percent.

No one is expecting fireworks from SAP, but that’s not the company’s style. In posting its most recent quarterly earnings, SAP confidently raised its three-year outlook and said it expects to surpass $20 billion in sales in 2020.

The S4/HANA in-memory enterprise resource planning software appears to be hitting on all cylinders, and SAP is making progress selling HANA as a standalone platform, thereby open up new revenue sources. Look for SAP’s cloud revenue to continue to grow in the 35 to 45 percent rate and for subscriptions to grow as a percentage of overall revenues.

SAP continues to defy the gravitational forces that have brought down other IT legacy giants. “For the last couple of quarters they have beaten my statistical trend line forecasts,” said Finos, who’s estimating the company’s software business will book $3.6 billion in quarterly revenues with more than a quarter of that coming from subscriptions. Analyst consensus estimates are $5.47 billion in total revenues and 78 cents in earnings per share.

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