Tech Results to Test Theory That Sector Dodged Major Virus Pain

(Bloomberg) -- Investors have treated technology companies as a relative haven from the Covid-19 pandemic, assuming the industry has avoided the most painful aspects of the crisis. That theory will be tested when the largest tech companies begin reporting results this week.

Digital advertising budgets are being slashed and demand for iPhones and other gadgets is sliding, while ride-hailing and online travel businesses have been hammered.

Despite all that, tech stocks have pulled away from the rest of the market recently. The tech-heavy Nasdaq 100 Stock index outperformed the Dow Jones Industrial Average in four out of five trading days last week. By Friday’s end, the gap between the two benchmarks had swelled to 5%, the largest in 18 years. That sets a high bar for results.

“When the big tech companies start reporting, let’s see how vulnerable they are,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors. “That to me is the biggest market risk factor.”

A few companies might disclose some good news. Millions of people are sheltering in place and going online for information, entertainment, social connection and shopping. While that’s providing new opportunities for user growth, it will likely take longer to turn the extra activity into revenue and profit.

Purves’s main concern is the health of marketing budgets, and how that will affect Google and Facebook Inc., the largest online ad companies.

“I don’t know what Google is going to say, or Facebook, but that to me is right now the single biggest risk factor,” he said. “It’s almost more substantial than any coronavirus news -- good or bad -- that you’re going to get.”

Google parent Alphabet Inc. could see revenue drop as companies buy fewer ads. Small businesses, which are major users of Google’s self-serve ad platforms, have been hit particularly hard by the dramatic drop in economic activity. The company’s expenses also could rise as it provides extra cloud-computing capacity for customers supporting millions of employees working from home.

Read more about the drop in digital ad budgets here.

Mark Mahaney, an analyst at RBC Capital Markets, expects $39 billion in revenue from the main Google business in the first quarter, up 8% from a year earlier. He sees second-quarter sales slumping 20%, year-over-year.

“Google was growing revenue in the high-teens percentages until mid-March when growth rapidly decelerated,” he wrote in a recent note to investors. The company’s ad business is particularly exposed to categories hit hard by Covid-19, including online travel agents.

Google CEO Sundar Pichai has already signaled trouble ahead, telling staff last week that the company is slowing hiring for the remainder of the year. “We exist in an ecosystem of partnerships and interconnected businesses, many of whom are feeling significant pain,” the executive wrote in a memo.

For much of its history, Facebook investors have followed a simple rule: the more people use the service, the more money it makes. But that’s unlikely to happen when ad budgets are falling, even as social-media activity surges.

Social Media Targets Fall as Ad Risk Offsets Higher Usage

Facebook will likely have to boost spending on data centers to support increased usage. Meanwhile, RBC’s Mahaney expects first-quarter ad revenue to climb 13% from a year earlier, and then drop 21% in the second quarter.

Apple Inc. results will be some of the most consequential in the company’s history. For much of the early part of the fiscal second quarter, Apple’s 42 stores in China were closed. Hundreds of other stores in its network were shut for most of March. Apple launched a new iPad Pro, Mac mini and MacBook Air in the period, but none of those products sell in enough volume to make up for any shortfall in iPhone shipments.

Goldman Sachs downgraded Apple shares on Friday and warned that iPhones sales could slump by more than a third in the second quarter.

Read about Apple’s credit outlook here.

The company had forecast sales of between $63 billion and $67 billion for the fiscal second quarter, but it pulled that guidance as the pandemic spread. Apple generated $58 billion in the same period last year, but the company is unlikely to report anything close to that given the pandemic.

The one silver lining may be the company’s services business. With so many people stuck at home, subscriptions to services such as Apple TV+, Apple News+, game downloads and movie rentals could jump.

App Store Sales Growth Hits Year-to-Date High; China Rebounds

Apple is unlikely to forecast results for the June quarter, but the company’s China-based supply chain is recovering and it anticipates opening some U.S. retail stores starting in early May.

Amazon.com Inc. has benefited from a surge in online shopping by people reluctant to visit retail stores during the pandemic. The company’s shares are up 29% so far this year, making it the seventh best performing stock in the S&P 500.

RBC’s Mahaney expects first-quarter revenue of $73 billion, up 23% from the same period in 2019.

“The surge in usage of Amazon is likely to drive sustainable shifts in behavior longer term even beyond the coronavirus crisis, as consumers try and fall in love with Amazon and as some traditional retailers struggle to come back,” Dan Morgan, a fund manager at Synovus Trust Company, said, citing data from a recent study of trends on Amazon’s digital marketplace.

Amazon Is Poised to Emerge From the Pandemic Stronger Than Ever

Still, profit margins could take a hit as shoppers load up on bulky items shipped for free, and Amazon offers raises to encourage warehouse workers to stay on the job. Mahaney is looking for an operating profit margin of 5.7% in the first quarter, down 170 basis points from a year ago.

Behind the scenes, Amazon Web Services likely benefited both from businesses buying more cloud-computing services to help employees work from home, and consumers stuck at home plugging into online services such as Netflix that rely on AWS.

Windows vs. Azure

The pandemic is hurting some parts of Microsoft Corp.’s business and helping others. The Windows and hardware divisions have suffered from supply chain disruptions and weaker demand for personal computers. In February, the company pulled its forecast for those businesses. Global personal computer shipments dropped the most since 2013 in the first quarter.

Meanwhile, the company’s Azure cloud business and its Teams chat and conferencing product are seeing increased use by companies seeking to keep business running as employees work from home.

Server demand

Intel Corp., the largest chipmaker, is expected to report revenue gains, partly driven by demand for server components. Owners of data centers have rushed by buy more machines to support an increase in online activity. Comments from Google’s CEO have undermined this thesis lately, though. Pichai said on Wednesday that the company will be “recalibrating” its investment data centers and servers.

Intel and rivals may also have been helped by customers ordering more chips to make sure they have sufficient stockpiles to ride out any further supply chain disruptions.

Investors will focus Intel’s forecast to see whether these trends will continue or be swamped by the economic downturn.

BMO Capital Markets analyst Ambergris Srivastava is looking for $19 billion in first-quarter revenue and reckons Intel will forecast sales of $17.8 billion for the second quarter. Both totals would represent gains from the same period in 2019.

Ride-sharing

With Covid-19 freezing normal activities, Uber Technologies Inc. and Lyft Inc. have seen demand crater for ride services.

Ride demand has dropped as much as 70% in the hardest hit regions. Last week, Uber withdrew its 2020 forecasts and said it will write down about $2 billion in investments. The company previously said it would be profitable by the end of this year, while Lyft has been targeting early 2021.

With few people to drive around, the companies are ramping up deliveries instead. UberEats is offering food delivery to businesses, waiving fees to customers and independent restaurants and making the service available to people without smartphones. Lyft now encourages drivers to deliver medical supplies and food to seniors and students, but has stopped short of working with restaurants directly.

Uber CEO Dara Khosrowshahi told analysts in March the company had $10 billion in unrestricted cash. Assuming a worst-case scenario with rides down 80% for the remainder of the year, Uber would have $4 billion to spare, he said. Lyft reported at the end of 2019 it had $2.9 billion in unrestricted cash, but hasn’t provided such visibility.

Video Conferencing

Software makers focused on communications are prospering during the pandemic. Zoom Video Communications Inc. quickly went from 10 million office users a day more than 200 million users now. Some have become paying customers. That could add a “few hundred million” dollars more in revenue this fiscal year, Bernstein analyst Zane Chrane wrote in a recent note.

Slack Technologies Inc. has seen robust demand for its workplace chatroom application. More than 9,000 new companies bought subscriptions between February and March, CEO Stewart Butterfield said, compared with 5,000 new paying customers in an average quarter.

©2020 Bloomberg L.P.