Today's negative pre-announcement from
) adds to the cloudy outlook for
). In many ways, Apple's problems are very company-specific: a
function of competitors are finally catching up to it. Apple's
smart-phones and tablets no longer have the field to themselves.
What this means is that Apple's growth outlook is a lot less
certain than was previously believed.
We will know more about Apple's earnings picture as the
company reports Q1 results after the close on April 23rd. But the
current Zacks Consensus estimate for Q1 is down almost 14% in the
last three months and estimates for the coming quarters likely
have more room to come down. In terms of growth, Apple's total Q1
earnings are expected to be down roughly -16% from the same
period last year.
The Key Trends
Apple's problems may be company specific, but plenty of its
hitherto high-flying Technology peers are faced with similar
earnings challenges. We saw in
) earnings report on Tuesday how the weak PC demand picture is
weighing on its outlook.
The situation isn't much different for other PC centric
Advanced Micro Devices
), to name just a few. Ironically, Apple played a leading role in
bringing the PC market to its knees.
Others are faced with different headwinds that lead to the
same earnings challenges. Companies with advertizing-based
business models like
) and others are struggling with monetizing the secular shift
from PC to mobile devices. This platform shift has material
consequences for these companies' margins, as do the headwinds
facing Apple and the PC players.
Expectations for Q1
These trends are clearly visible in the aggregate earnings
expectations for the sector. And let's not forget, Technology is
the largest earnings contributor to the S&P 500. It's not
without basis to say that 'as goes Tech, so goes the S&P
500.' Total earnings for the sector are expected to be down -8%
from the same period last year, which is a big contributor to the
expected -1.6% decline for the S&P 500 as whole.
The revenue picture isn't that bad, with total sector revenues
in Q1 expected to be up +2.8%. And this spotlights the margin
problem we referred to earlier for the individual companies. Net
margins for the sector in Q1 are expected to be down more than
200 basis points from the same period last year and essentially
flat from the preceding quarter.
What About Beyond Q1?
In terms of earnings, the first and third quarters are
typically the seasonally weak periods for the sector. As such,
the market may be willing to cut the Tech companies some slack
for a weak showing this reporting season. But a lot will depend
on how they guide towards the coming quarters, as expectations
for the coming quarters, particularly the second half of the
year, are for a resumption of strong growth.
Current consensus expectations are for total Tech sector
earnings to increase by +8% in the second half of the year after
declining by -5% in the first half. The second half recovery is
then expected to carry into 2014, resulting total earnings growth
for the sector of +13.3%.
A big part of these second-half 2013 and full-year 2014
earnings recovery hopes rest on margin expansion. On a quarterly
basis, net margins for the sector peaked in 2012 Q3 and have yet
to get back to those levels.
On an annual basis, the sector's net margins have been
essentially flat since 2011, but are expected to make strong
gains later this year and next year after contracting in the
first half of 2013. Hard to envision such margin gains given the
multiple headwinds facing them.
Putting It All Together
What all this boils down to is that earnings expectations for
the broader S&P 500 in general and the dominant Technology
sector in particularly remain elevated. I am not talking about
estimates for the currently underway first quarter of 2013, but
the coming quarters, particularly the second half of the year and
next year. Those estimates need to come down and they most likely
will come down after we hear from management teams.
Tech stocks haven't been the leading stock market performers
this year, up +8.6% year to date vs. the +11.4% gain for the
S&P 500 in that same time period. It is perhaps reasonable to
expect this group to give back some of those gains in the coming
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