What's Going on with Tech Earnings? - Analyst Blog
April 17 2013 - 12:36PM
Zacks
Today's negative pre-announcement from Cirrus
Logic (CRUS) adds to the cloudy outlook for
Apple (AAPL). In many ways, Apple's problems are
very company-specific: a function of competitors are finally
catching up to it. Apple's smart-phones and tablets no longer have
the field to themselves. What this means is that Apple's growth
outlook is a lot less certain than was previously believed.
We will know more about Apple's earnings picture as the company
reports Q1 results after the close on April 23rd. But the current
Zacks Consensus estimate for Q1 is down almost 14% in the last
three months and estimates for the coming quarters likely have more
room to come down. In terms of growth, Apple's total Q1 earnings
are expected to be down roughly -16% from the same period last
year.
The Key Trends
Apple's problems may be company specific, but plenty of its
hitherto high-flying Technology peers are faced with similar
earnings challenges. We saw in Intel's (INTC)
earnings report on Tuesday how the weak PC demand picture is
weighing on its outlook.
The situation isn't much different for other PC centric players
like Hewlett-Packard (HPQ), Dell
(DELL), Microsoft (MSFT) and Advanced
Micro Devices (AMD), to name just a few. Ironically, Apple
played a leading role in bringing the PC market to its knees.
Others are faced with different headwinds that lead to the same
earnings challenges. Companies with advertizing-based business
models like Google (GOOG),
Facebook (FB), Yahoo (YHOO) and
others are struggling with monetizing the secular shift from PC to
mobile devices. This platform shift has material consequences for
these companies' margins, as do the headwinds facing Apple and the
PC players.
Expectations for Q1
These trends are clearly visible in the aggregate earnings
expectations for the sector. And let's not forget, Technology is
the largest earnings contributor to the S&P 500. It's not
without basis to say that 'as goes Tech, so goes the S&P 500.'
Total earnings for the sector are expected to be down -8% from the
same period last year, which is a big contributor to the expected
-1.6% decline for the S&P 500 as whole.
The revenue picture isn't that bad, with total sector revenues
in Q1 expected to be up +2.8%. And this spotlights the margin
problem we referred to earlier for the individual companies. Net
margins for the sector in Q1 are expected to be down more than 200
basis points from the same period last year and essentially flat
from the preceding quarter.
What About Beyond Q1?
In terms of earnings, the first and third quarters are typically
the seasonally weak periods for the sector. As such, the market may
be willing to cut the Tech companies some slack for a weak showing
this reporting season. But a lot will depend on how they guide
towards the coming quarters, as expectations for the coming
quarters, particularly the second half of the year, are for a
resumption of strong growth.
Current consensus expectations are for total Tech sector
earnings to increase by +8% in the second half of the year after
declining by -5% in the first half. The second half recovery is
then expected to carry into 2014, resulting total earnings growth
for the sector of +13.3%.
A big part of these second-half 2013 and full-year 2014 earnings
recovery hopes rest on margin expansion. On a quarterly basis, net
margins for the sector peaked in 2012 Q3 and have yet to get back
to those levels.
On an annual basis, the sector's net margins have been
essentially flat since 2011, but are expected to make strong gains
later this year and next year after contracting in the first half
of 2013. Hard to envision such margin gains given the multiple
headwinds facing them.
Putting It All Together
What all this boils down to is that earnings expectations for
the broader S&P 500 in general and the dominant Technology
sector in particularly remain elevated. I am not talking about
estimates for the currently underway first quarter of 2013, but the
coming quarters, particularly the second half of the year and next
year. Those estimates need to come down and they most likely will
come down after we hear from management teams.
Tech stocks haven't been the leading stock market performers
this year, up +8.6% year to date vs. the +11.4% gain for the
S&P 500 in that same time period. It is perhaps reasonable to
expect this group to give back some of those gains in the coming
days.
APPLE INC (AAPL): Free Stock Analysis Report
ADV MICRO DEV (AMD): Free Stock Analysis Report
CIRRUS LOGIC (CRUS): Free Stock Analysis Report
DELL INC (DELL): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
YAHOO! INC (YHOO): Free Stock Analysis Report
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