Technology Earnings: Reports from Three Industry Heavyweights
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors in the technology sector are apprehensive heading into the final weeks of earning season. The number of technology companies that have posted disappointing results in recent days exceeds the amount that managed to beat consensus. Apple, Intel, Microsoft, Nokia, and Western Digital all showed weaker-than-expected hands in January. In contrast, eBay, Google, IBM, and Netflix are among the select few that posted a strong report card.
Here are three technology standouts that provide quarterly earnings on Tuesday and my expectations for each.
Amazon.com (NASDAQ: AMZN)
Tuesday, Jan. 29 after market close; $0.28 EPS / Revenue $22.27B
Shares of the world’s largest online marketplace continue to defy gravity with a 12% year-to-date gain through Friday, January 25 compared to only a 6% YTD gain for the S&P 500 index. A possible reason for the outperformance in Amazon is the underperformance in Apple, which has declined 12% year-to-date. Money managers who need to maintain exposure in the technology sector quite likely are rotating out of Apple and into Amazon. Apple has a market capitalization of $413 billion compared to Amazon’s market cap of $129 billion, approximately one-third the size.
Amazon has also seen multiple analyst upgrades in recent days, ahead of upcoming fourth quarter results. On January 18, Pacific Crest raised the stock to Outperform from Sector Perform, stating Amazon should be able to sustain its high level of revenue growth due to acceleration in mobile commerce. The investment firm has a $346 price target on the shares. ISI Group also initiated coverage of Amazon on January 24 with a $320 price target.
My take on Amazon: I feel it’s important to emphasize that the positive outlook on Wall Street does not pay enough credence to the fact that Amazon hardly makes money as a public company. Amazon has only posted a profit in two of the last four quarters, and the company’s net profit margin is a narrow 0.28%, leaving little room for error. Many critics feel Amazon CEO and Founder Jeff Bezos continues to get a “free pass” on Wall Street. Amazon has seen earnings decline in spite of positive revenue growth in the last 12 months. Revenue has grown a massive 31% in the last year.
On a technical basis, Carter Braxton Worth believes shares are overextended and could pull back up to 30% in coming months. Worth is the chief market technician at Oppenheimer & Co. in New York. When presenting his analysis, Worth displayed a multi-year chart of Amazon, stating the stock needs to retrace back to the trend line in order for the long-term uptrend to remain healthy.
Broadcom (NASDAQ: BRCM)
Tuesday, Jan. 29 after market close; $0.73 EPS / Revenue $2.07B
Broadcom was founded in 1991 and became a became a public company in 1998. This $20 billion dollar technology giant develops semiconductors for wired and wireless communications.
For the current quarter, investors will give significant weight to Broadcom’s mobile and wireless growth outlook. The company’s networking chips are used in a “Who’s Who” list of today’s most popular devices, including both Apple and Samsung manufacturers. Shares of Broadcom fell following Apple’s quarterly results on Wednesday, as investors believe Apple has decreased its order for iPhone 5 parts following weaker-than-expected demand.
Research firm Pacific Crest believes that strength from Samsung smartphones and the Apple iPad will offset any weakness in demand for iPhone 5 parts. Broadcom’s chips power both the third-generation iPad with LTE capability and new iPad mini devices.
Furthermore, if history serves as a reliable indicator, audio parts supplier Cirrus Logic sold off in conjunction with Broadcom on Apple weakness, only to subsequently rally with its own earnings report. I believe we could see a similar reaction to Broadcom’s report on Tuesday.
Broadcom’s business is most similar to technology compatriot Qualcomm, which also reports this week on January 30. Among the two, I prefer Qualcomm, which experienced nearly 30% revenue growth and 13% earnings growth in the past year, compared to Broadcom which experienced only 3% revenue growth and a decline in earnings. Shares of Qualcomm have risen fractionally since I published The Troll at the Gate: Why This Company is the Clear Winner in Smartphones on November 30.
Corning (NYSE: GLW)
Tuesday, Jan. 29 before market open; $0.33 EPS / Revenue $2.07B
Shares of Corning have posted a 3% marginal decline in the New Year, despite three separate firms all downgrading the stock and lowering estimates prior to Tuesday’s upcoming release.
Goldman started the party on December 28, when the firm lowered its earnings estimates and price target to $14.50 from $16, but kept a Buy rating on the stock. In its note to clients, Goldman states the recent Japanese yen depreciation will have a negative impact on earnings. In addition to the currency risk, Goldman expects a decline in glass market volumes for Corning’s calendar first quarter, which is currently underway (January 1 - March 31).
Less than two weeks later, Goldman came full circle on January 11 in downgrading the stock to Neutral from Buy, evidently gaining further confidence in their previous assessment while lowering Corning’s price target to $14 from $14.50. On January 17, investment firms Oppenheimer & Co. and RBC Capital also jumped on board. RBC downgraded the stock to Sector Perform from Outperform, citing price declines in Gorilla Glass and lack of near-term catalysts. Oppenheimer made similar comments to Goldman, stating that Q1 EPS will likely come in below estimates however it maintained its Outperform rating on the stock due to a stronger long-term outlook.
On a positive note, Apple news and rumors website AppleInsider believes that Corning’s proprietary Gorilla Glass 3 product is being considered for use in Apple’s next generation devices, including both iPhones and iPads. Multiple news outlets have reported that the glass is more durable than its predecessor, Gorilla Glass 2, and also harder to scratch. Corning showcased its next-generation touchscreens at the Consumer Electronics Show in Las Vegas during early January.
Economic Data for Tuesday, January 29
On the economic front, investors will receive new data from S&P / Case-Shiller and the Conference Board on Tuesday.
In December, data released by Standard & Poors showed that home prices rose approximately 4.3% in the 12 months ending October. Among the 20 cities in the national index, Phoenix home prices rose for 13 consecutive months while San Diego was second best with 9 consecutive monthly gains. S&P / Case-Shiller will release their monthly index report through November at 9:00 a.m.
The Conference Board, a non-profit business membership and research organization, releases its Consumer Confidence report for January at 10:00 a.m. The index posted a slight decline in November, followed by a sharper decline in December based on decreased consumer expectations going forward. For further information, visit the Conference Board’s official website.
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johnmacris has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Corning. The Motley Fool owns shares of Amazon.com and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!