After the market got spooked by bank failures in March, investors scurried toward info tech, especially mega-caps like Apple (AAPL) and Microsoft (MSFT). Those companies—with their vast cash flows and “moats” around key products—often rally when other parts of the market grow shaky.
Info tech also got a boost from recent headlines about advances in artificial intelligence (AI). While the potential capabilities of this technology triggered fear in some quarters, many big tech companies believe AI is a future growth driver. Investors apparently agreed.
As tech earnings approach, investors might learn if their instincts in sending the sector up 20% during Q1 reflected real-world strength or simply impressions of it. The mega-caps, after all, had their struggles in the final quarter of 2022, and a few recent developments also raised questions.
For instance, last month Amazon (AMZN) said it would cut jobs in its Amazon Web Services (AWS) cloud business, the main AMZN growth driver for years. And there were recent media reports that AAPL’s Mac computers saw shipments fall around 40% in Q1. That number was from a market intelligence provider, not AAPL itself, but it suggests softening in one of the tech giant’s core businesses.
Meanwhile, the semiconductor business hasn’t fully emerged from the dark woods of soft demand. Micron (MU), which reported results last month for its fiscal year (FY) Q2, said sales fell more than 50% from a year earlier, though it predicted better days ahead.
Those are just a few items tech investors should keep in mind heading into Q1 earnings. Microsoft and Alphabet (GOOGL) are expected to kick things off on Tuesday, April 25, with Intel (INTC) and AMZN later that week and AAPL the first week of May.
Investors monitoring tech’s Q1 earnings might have some of the following questions:
- How’s cloud demand shaping up so far in 2023 for companies like MSFT, AMZN, and GOOGL? Has the outlook improved, and if so, why?
- What’s current consumer demand like for popular electronic products like video games, cars, phones, and other devices that use technology like chips?
- Has China’s reopening been a positive Q1 development?
- Is a falling U.S. dollar supporting earnings growth, and how is it affecting overseas demand?
- How’s the merger and acquisition environment shaping up so far this year after a slow 2022?
Whatever the answers, analysts expect info tech earnings to be among the worst year over year in Q1. They’ll decline 15% from the same quarter a year ago, according to analyst estimates compiled by research firm FactSet. Semiconductors could be the weakest performer of any tech subsector.
“We expect Q1 to have been hurt by extremely tough comparisons, macro challenges, write-downs in cyclical markets, consumer preference on goods over services, and negative forex acting as headwinds,” research firm CFRA wrote in a recent note. “We believe the semiconductor sector likely bottomed in Q1, as customer inventories appear to be improving, while the worst of the technology hardware declines are likely behind us.”
Cuts and cloud in focus
Recent industry job cuts could be a sign that top-line info tech sector growth is easing, forcing companies to accept a slower environment going forward. As Barron’s noted earlier this month, “Tech companies are cutting costs (and) so are their customers.”
Cloud spending, in particular, is easy for corporate customers to ramp up and down based on business conditions, Barron’s noted. Many large companies spent the last few years building their clouds, and now they find themselves most of the way to their destination. This implies that once massive quarterly cloud growth could be a thing of the past soon for leaders like AMZN and MSFT.
Under pressure: Q1 info tech earnings
Tech is expected to be the third-worst sector performer in the S&P 500® for Q1 earnings, FactSet noted. Revenue is expected to drop 4.2%. Analysts project net profit margin for the sector at 21.6%, down from 24.4% a year earlier.
If you see a troubling pattern here, you’re not alone. Analysts expect earnings, revenue, and margins all to drop for tech in Q1, but stocks in the sector gained more than 20% that quarter.
As of mid-April, the forward price-earnings (P/E) ratio for info tech stood at 25.7, according to CFRA, up from around 21 at the start of the year. Tech stocks are more expensive now, so the question is whether profits and the outlook for future profits can top current estimates. If not, the sector might struggle.
Latest consensus
Here’s a quick look at what to watch as some individual tech firms report.
Microsoft (MSFT)
Scheduled report date: Tuesday, April 25, after the close
- Expected FY Q3 EPS (analysts’ consensus): $2.23
- Year-ago FY Q3 EPS: $2.22
- Expected FY Q3 revenue (analysts’ consensus): $51.02 billion
- Year-ago revenue: $49.36 billion
The big Q1 news for MSFT was its new AI features, including the addition of ChatGPT. These features are part of MSFT’s new Copilot, which will be available in the Microsoft 365 software suite. MSFT calls this “your copilot for work” and says it can “turn your words into the most powerful productivity tool on the planet.”
With Copilot, MSFT arguably becomes one of the leaders in AI, which might account for some of the Q1 enthusiasm around MSFT’s shares. They rose a solid 20% between the end of 2022 and mid-April and are closing in on last summer’s highs. Investors appeared enthused at MSFT’s application of AI to some of its popular tools, including search engine Bing. Some analysts think AI could revive MSFT’s search business, Barron’s reported.
One issue going into FY Q3 earnings, however, is what appears to be slowing growth in cloud. Last quarter, MSFT guided for its “intelligent” cloud revenue—including Microsoft Azure—to grow 17% to 19%. That compares with 26% growth a year ago
Azure growth slowed to 31% in MSFT’s FY Q2, down from 35% in the previous quarter, and MSFT said in January it expects Azure growth to slow further in FY Q3. Some analysts are more optimistic than others, but anything with a 3 as a first digit—as in 30% or better—might be seen as a victory.
MSFT also could get dinged by industrywide weakness in personal computer sales. This category took off during the pandemic, meaning demand got pulled forward and now has slowed. Fewer PC sales can reduce demand for MSFT’s software.
Meta (META)
Scheduled report date: Wednesday, April 26, after the close
- Expected Q1 EPS (analysts’ consensus): $1.99
- Year-ago EPS: $2.72
- Expected Q1 revenue (analysts’ consensus): $27.61 billion
- Year-ago revenue: $27.91 billion
Shares of META lost more than half their value last year. Then came 2023, and the fresh new calendar page did wonders for META’s stock price. Shares rose an astonishing 85% between the end of 2022 and mid-April, though they remain well below their late-2021 highs.
To be fair, the recent rally didn’t have much to do with the calendar and had a lot more to do with META’s cost-cutting plans. META’s done two rounds of layoffs over the last six months and plans two more to eliminate a total of 21,000 positions. Additionally, the company is closing 5,000 open positions, The New York Times reported. Together, all this adds up to 30% of META’s workforce. The company has also started selling some of its real estate.
Just before the layoff news, META disappointed Wall Street with its Q4 guidance, and shares fell to a six-year low following two consecutive quarters of lower revenue for the social media company with products like Facebook, WhatsApp, and Instagram.
Despite the stock’s rally, industry-thought leaders continue to question metaverse demand and note META’s struggles in other facets of its business, like advertising. The company has sold 20 million virtual reality headsets, The New York Times said, but has struggled to get customers to return and regularly use the product.
When META reports, check for user growth trends across META’s platforms after relatively small gains in Q4. Another area to watch is ads, where impressions rose but average prices fell in Q4. Total costs also increased sharply in Q4 and in 2022, but perhaps the drop in headcount could start to help on that front.
Apple (AAPL)
Scheduled report date: Thursday May 4, after the close
- Expected FY Q2 EPS (analysts’ consensus): $1.43
- Year-ago FY Q2 EPS: $1.52
- Expected FY Q2 revenue (analysts’ consensus): $92.84 billion
- Year-ago revenue: $97.28 billion
AAPL investors, like their META counterparts, enjoyed stock gains over the course of Q1. The Q1 rally came despite a surprisingly weak holiday quarter that saw AAPL’s revenue drop 5% year over year, the first quarterly decline since 2019. CEO Tim Cook said at the time that a strong dollar, iPhone production issues in China, and the overall macro environment combined to hurt sales. AAPL missed analysts’ holiday quarter revenue and earnings estimates.
Mac sales could be the troubling issue this time out if recent reports are right. Research firm IDC said earlier this month that AAPL’s worldwide computer shipments fell more than 40% in Q1. Competitors also saw lower shipments, the firm said, but AAPL’s declined the most, implying loss of market share. Mac sales already took it on the chin in late 2022, falling nearly 29% in the holiday quarter, which was AAPL’s FY Q1.
AAPL doesn’t provide much in the way of guidance, making it hard to know quite what to expect when the company opens its books. Keep an eye on services revenue, a very profitable business for AAPL where sales rose just 6.4% FY Q1 to slightly exceed analysts’ estimates.
The critical iPhone revenue line fell more than 8% in FY Q1, but the company said in January it expects less of a decline in the March quarter, CNBC reported. Services, AAPL said, should grow.
A slightly weaker dollar over the course of Q1 might provide a sequential revenue tailwind. The dollar generally traded lower in Q1 than in Q4. AAPL has huge international businesses and would likely be helped if a falling dollar made its products less expensive overseas.
The company’s conference call is also a chance to hear from executives about the latest progress as AAPL shifts some of its manufacturing to India.
Alphabet (GOOGL)
Scheduled report date: Tuesday, April 25, after the close
- Expected Q1 EPS (analysts’ consensus): $1.07
- Year-ago EPS: $1.23
- Expected Q1 revenue (analysts’ consensus): $68.85 billion
- Year-ago revenue: $68.01 billion
GOOGL approaches earnings with shares up about in line with overall sector performance so far this year but down dramatically from year-ago levels. More than most tech stocks, GOOGL relies on advertising to fuel progress, and ads remain front and center as GOOGL reports Tuesday.
Ad spending in the tech and media sectors slowed dramatically in 2022, and that showed up in GOOGL’s Q4 earnings results. Advertising revenue fell more than $2 billion in Q4 from a year earlier, with drops in major platforms including Search and YouTube. In January, GOOGL laid off 12,000 employees.
However, the company’s Q4 earnings release quoted executives saying they saw “great momentum” in GOOGL’s Cloud, YouTube, and Pixel devices businesses. AI, they said, could provide “leaps” in Search and beyond. Keep an eye on the cloud, where revenue came in shy of Wall Street’s Q4 estimates despite 32% year-over-year growth.
Layoffs and lower advertising put the spotlight on GOOGL’s cost-cutting initiatives, and investors might want more color around those when GOOGL reports. Operating margins fell in both Q4 and in 2022 versus a year earlier.
GOOGL’s Q4 earnings and revenue both missed analysts’ expectations, and the stock dropped following the news. Traffic acquisition costs were a bit lower than expected, however, which is a minor positive. The company’s 1% quarterly revenue growth was its worst since 2018, so arguably the bar is set low for Q1.
Amazon (AMZN)
Scheduled report date: Thursday, April 27, after the close
- Expected Q1 EPS (analysts’ consensus): $0.22
- Year-ago EPS: –$0.38
- Expected Q1 revenue (analysts’ consensus): $124.46 billion
- Year-ago revenue: $116.44 billion
The industry’s largest cloud business belongs to AMZN, putting it center stage Thursday after MSFT and GOOGL report. Slowing cloud growth could make AMZN’s path trickier, because its AWS platform has driven so much of the company’s recent growth. AWS quarterly growth of 20% in Q4 was short of Wall Street’s expectations.
Last time out, AMZN issued a forecast for Q1 revenue of between $121 billion to $126 billion. That partly reflected pressure from a strong dollar, which has fallen since then and may provide a bit of a Q1 tailwind.
AMZN is far more than AWS, of course, and its online store sales fell 2% in Q4. Consumer spending showed recent signs of strength, which could be another support point for AMZN when it reports.
Like other tech companies, AMZN has been cutting positions, saying last month it would lay off another 9,000 employees on top of an earlier round that trimmed payrolls by 18,000. The late-quarter decision to cut cloud computing jobs raised industry eyebrows, suggesting AWS growth might remain constrained.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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