With the US earnings season in full swing, investors are eagerly awaiting next week’s numbers from the big tech names such as Apple, Amazon and Google (Alphabet), which together dominate the major US equity indices.
Capital.com spoke to four analysts about the common themes and trends to expect from the upcoming reports from the tech giants.
Another quarter of `incredible results?’
Zacks Investment Research expects the tech sector to report a 33.7% jump in earnings for the second quarter and an 18.3% increase in revenues, according to chief equity analyst John Blank. This would trail the stellar 53.9% growth seen in the previous quarter.
“I am looking for incredible results,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners. “Across the board for second-quarter earnings we are going to have strong beats and growth rates.”
Will the digitalisation trend continue?
A trend of accelerated digitalisation during pandemic saw the tech firms’ revenues spike as consumers confined to homes needed more of their products and services.
Yet, with lockdowns being lifted and people getting out of their homes, investors will be looking for guidance on how tech-sector prospects may develop once economic activity starts getting back to normal, according to Russ Mould, investment director at AJ Bell.
Sophie Lundt-Yates, equity analyst at Hargreaves Lansdown, sees potentially slower growth in cloud services and hardware sales as people move towards the so-called hybrid working model – which allows a mix of onsite and off-site functioning – from the work-from-home trend that had boosted tech demand.
Tigress’s Feinseth expects the digitalisation trend to continue, but sees consumers shifting more into mobile devices.
“People will play games and watch streaming video content on their phones while they travel or commute,” he said. “The trends and habits that were created during the pandemic will continue in the post-virus mobile world.”
Global chip shortage
Apple’s results will be scrutinised for any evidence of the global silicon-chip shortage hurting sales, according to AJ Bell’s Mould.
“It’s a global shortage, everyone is facing it,” said Lansdown’s Lundt-Yates. “The bigger question will be the outlook statements and how they plan to deal with it. With Apple bringing a lot of their chip-making in house, does that offer more protection?”
Tigress’s Feinseth expects chip makers to always put big companies like Apple first for fear of losing cash-rich clients. “Apple has recently warned suppliers they’re ramping up production next year on the iPhone 13. The company will benefit from the preferred customer treatment, as all the big tech names are priority for their suppliers,” he said.
AJ Bell’s Mould said that the US antitrust case targeting big tech names could pose risks to the companies.
“Regulatory pressures lurk in the background for many, on competition, anti-trust or data use grounds, and Google has just been hit with a new fine by France,” he said. “Each firm may also be asked for its view on the G7’s proposed tax treaty on multi-national tech companies and how this could affect earnings.”
Yet, the investor community would welcome it if these companies were to spin off divisions or break up if forced, as that it would only unlock value, according to Tigress’s Feinseth.
“If Amazon Web Services was a standalone company, investors would love that you could get insight on what is a fast growing and highly profitable company,” he said.
More dividends and share buybacks
All analysts interviewed see a chance for more cash being returned to investors in the form of dividends or share buybacks from Apple, Facebook, and Google’s parent company, Alphabet. But not Amazon, which currently offers neither.
“All of these companies – Apple, Facebook, and Alphabet – are intellectual capital intensive, and that’s why they’ve been returning so much,” said Tigress’ Feinseth.
Amazon, on the other hand, is expected to continue to reinvest extra cash in its businesses. “Amazon’s status quo is very much to plough as much as possible back into the business to propel growth,” said Lansdown’s Lundt-Yates. “If they decided to step away from that it would be a big cultural change to the stock.”
Where next for tech stocks?
High valuations pose concerns for Lansdown’s Lund-Yates. “It’s really important to keep in mind that the pandemic has pushed the valuations really high. A good set of results isn’t necessarily enough,” she said.
Fainseth’s view is that tech stocks are set for “further upside,” driven by catalysts such as strong earnings reports, potential dividend hikes and share buybacks.