Trade Wars, Privacy and Trump: What to Expect for Tech Earnings

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(Bloomberg) -- It’s earnings season again, and for the tech sector, it’s shaping up to be one of the most interesting in a while.

Global technology giants, which fueled the bull market to its highest heights earlier this year, are suddenly being assailed from all sides. A brewing trade war between the U.S. and China is imperiling mergers and threatening the global interconnectivity that has helped the industry thrive. A crisis has been spreading over how political-data firm Cambridge Analytica got access to millions of Facebook users’ personal information, upending the assumption that consumers will blithely give up their private details as a fair trade-off for using free services like Facebook, Google and Twitter. And don’t forget U.S. President Donald Trump’s Twitter tirades against Amazon and founding CEO Jeff Bezos.

All this has made for a seriously volatile few weeks for tech stocks, with some investors fearing a profit-draining regulatory clampdown, and others jumping in to take advantage of the discount on shares that have been expensive for years. With most of the biggest names about to report results for the March quarter, the market will finally get a chance to figure out whether the concerns plaguing big tech truly pose a threat to the bottom line.

Some clues about how things could go have already emerged. Wall Street analysts have mostly held the line that a divided U.S. Congress won’t come down hard on data-gathering business models like Facebook or Google anytime soon. Only one of the dozens of equity analysts that cover Facebook has cut the social network’s rating since the Cambridge Analytica situation came to light. Most, like Goldman Sachs’s Heather Bellini, expect “little to no impact” on advertising spending.

Still, investors will be intently focused on any commentary from executives about user engagement, writes UBS’s Eric Sheridan. Even if revenue and profit numbers are good, the question remains whether positive results can outshine the “wall of worry,” he said.

Also this week, Taiwan Semiconductor Manufacturing Co., the leading smartphone chip manufacturer, sent shivers across the semiconductor sector and weighed on Apple stock when it issued a disappointing growth forecast. That rekindled concerns that the handset boom is waning.

Amazon gave investors something to get excited about. Bezos disclosed for the first time on Wednesday that 100 million people now pay up for an Amazon Prime subscription. Netflix, which kicked off technology earnings earlier this week, proved again that the world is rushing headlong into online streaming. The stock rose 9.2 percent to a record the day after the company said it added 7.41 million users in the quarter despite raising prices.

Here’s a rundown of what to look for from each of the biggest tech companies reporting in the coming weeks:

Alphabet

A growing concern for Alphabet investors is the possibility that internet-search and digital-ad behemoth Google will be a casualty of public backlash against Facebook. Regulation placing restrictions on data collection and privacy in online advertising could handicap the $95.4 billion business. But for the first quarter, investors are more focused on how quickly costs are rising.

Parent company Alphabet, which reports on April 23, is projected to post a 21 percent jump in revenue to $24.3 billion, and net income is seen rising to $9.29 a share. Analysts will be watching Google’s traffic acquisition costs -- the amount doled out to partners to run search and ads -- as well as spending in other areas. Morgan Stanley warned in a recent note that the market was underestimating Google’s operating expenses for units like hardware, cloud and YouTube.

Facebook

Facebook might be costing investors the most sleep, given its central role in the ongoing debate over what social networks do with consumers’ personal information. New data-protection rules in Europe requiring companies to make it easy for people to opt out of such collection could damage Facebook’s growth, especially since Chief Executive Officer Mark Zuckerberg has promised to follow the spirit of the rules globally. The stock, which soared 53 percent in 2017, is down 4.7 percent this year.

In Facebook’s report April 25, any weakness in advertising revenue or negative executive commentary would outweigh otherwise positive results, Deutsche Bank’s Lloyd Walmsley said in an April 18 note. On the flip side, shares could rise if the tone from executives is upbeat and the social network talks down concerns about people opting out of data collection, Walmsley said.

So far, Zuckerberg has said the company isn’t sensing a material impact from user account deletions, but Chief Operating Officer Sheryl Sandberg told Bloomberg News that a small number of advertisers have paused spending on the social network.

Amazon

Trump’s attacks on Amazon haven’t had much of an impact on the e-commerce giant’s business, but with the backdrop of heightened government scrutiny of Facebook, the president’s bark actually had some bite when it came to the stock price. Investors are likely to probe Amazon for any vulnerabilities to government action -- including postal rate hikes -- on the company’s earnings call after the release on April 26. Otherwise, they’ll look for the usual metrics to determine how quickly Amazon continues to grow and how much of the company’s revenue Bezos is plowing back into its many businesses.

Sales for the first quarter are estimated to reach $49.9 billion, the average estimate of analysts surveyed by Bloomberg. That’s up 40 percent from a year earlier, thanks in part to a big boost from last year’s acquisition of grocery chain Whole Foods. Analysts project earnings of $1.26 per share, down from $1.48 a year earlier, as Amazon keeps investing in international expansion, data centers for its cloud-computing division, new devices and original programming for video streaming.

Intel

The world’s second-largest chipmaker continues to shrug off the market pressures that surround it. Analysts expect Intel to say sales grew for a 10th straight quarter, even as the personal-computer industry, the main market for its chips, continues to shrink.

A bunch of would-be rivals, led by Advanced Micro Devices Inc., haven’t yet dented Intel’s more than 99 percent market share in processors for servers -- machines that power networks and data centers -- a dominant position that helps keep the company’s gross margin fatter than 60 percent. To spread out its bets, Intel has ramped up investments in memory chips and semiconductors for artificial intelligence and self-driving cars. Any narrowing of margins would validate the view of skeptics, who say it’s just a matter of time before Intel’s continued reliance on PC chips starts to hurt results. Intel also reports on April 26.

Microsoft

That same day, Microsoft is projected to say that sales climbed 9 percent to $25.8 billion, buoyed by rapid growth in its cloud businesses. Those include Azure, which lets corporate customers run and store applications in Microsoft’s data centers, and increasingly popular online versions of Office productivity applications like Word and Excel. Much of Microsoft’s revenue comes from multiyear software licenses and cloud-subscription payments, which insulate it somewhat from the regulatory threats that are casting shadows on companies that get more of their revenue from internet advertising.

Apple

Apple sells phones and not advertising, helping it avoid the brunt of the data-privacy firestorm -- though CEO Tim Cook did weigh in on the crisis. In the company’s report on May 1, investors will be paying close attention to iPhone sales. In the holiday period, sales of the smartphone were strong, but didn’t match investor expectations. This quarter, analysts at Goldman Sachs are looking for iPhone sales of 53 million units. There’s also the prospect of a higher average selling price, which would indicate people are buying the $999 iPhone X.

Analysts on average project fiscal second-quarter sales rose 16 percent to $61.1 billion. Investors should also pay close heed to Apple’s services business after the company issued a bold projection of services becoming a $50 billion-a-year business by 2021. Another thing to keep in mind: the possibility of a sweetened share-buyback program or increased quarterly dividend after the U.S. tax overhaul, which gave companies an incentive to bring back cash stashed overseas. Apple could also issue a one-time special dividend.

©2018 Bloomberg L.P.

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