High hopes and big risks in tech earnings
The biggest risk for investors in technology, with stock prices up a whopping 55 percent this year, is they might be just a little too happy.
All the buzz isn’t without cause: Corporate technology spending could be set to rebound next year, cost-cutting is paying dividends, and dealmaking is back in a big way.
Those good vibrations will be tested next week, when some of the biggest names in technology, including Intel Corp, Google Inc, and IBM, post quarterly earnings.
“Clearly everybody expects beats in the September quarter,” said Broadpoint AmTech analyst Brian Marshall. “People are expecting to see positive business trends unfold and they’re looking for nice optimistic guidance in the December” quarter.
Such outsized expectations could trip up the industry. Reporting earnings that beat forecasts by, say, a penny per share may not keep investors happy, particularly if companies count on cost-cutting rather than revenue growth to get there.
The same goes for a solid, but unspectacular, outlook for the fourth quarter or 2010.
Call it the Blackberry scenario. Last month, the maker of the device, Research In Motion, reported quarterly profit of $1.03 a share, compared with analysts average forecast of $1 a share. But revenue came up short, its outlook disappointed investors, and the stock got crushed, dropping more than 16 percent.
WHITHER REVENUE … OR REVENUE WITHERS?
For the broader industry, one of the main concerns is where revenue growth will be found easy pay day loans. Overall corporate spending on technology is still at much lower levels than last year, and spending in Europe remains a big worry.
Indeed, only a handful of companies are expected to post revenue growth, including Apple Inc, Google, Verizon Communications Inc, and Amazon.com Inc.
Expectations for the technology industry have nonetheless improved over the past three months. In July, analysts expected tech companies to post a 20 percent decline in third-quarter earnings from a year earlier. Now, they expect earnings to slide just 14 percent, according to data from Thomson Reuters.
Stock prices underscore the optimism. The Morgan Stanley Hi-Tech index of major tech stocks is up around 55 percent this year and 19 percent since the beginning of July. While the Standard & Poor’s 500 has kept pace over the past three months, it is still up a more modest 18 percent this year.
Most likely, only hefty earnings beats or rosy forecasts will keep that sort of momentum going, analysts said.
Along with quarterly earnings, investors will be keen to hear any commentary on consumer demand ahead of the holidays and about a hardware refresh cycle by businesses that is expected to begin next year.
Helped by healthier consumer spending, global semiconductor sales rose 5 percent in August from July. That marked a sixth consecutive month of sequential growth.