Tech Earnings Kick-Off Next Week: What's Hot, What's Not - Analyst Blog

Sentiments appear to be turning down ahead of earnings week, with most tech bellwethers taking it on the chin.

From market research to guidance cuts to FX and China exposure, tech news flow has been predominantly negative. Here are the major points:

PC Market Slump : Like it or not, PC market sluggishness is set to continue with a number of factors contributing (lower corporate IT spending, cannibalization by mobile devices, market saturation, FX and the big one -- free Windows updates). Chip stocks like Intel INTC , Advanced Micro Devices and NVIDIA are the worst affected, struck by negative views from both IDC and Gartner. Of these, Gartner went a step further to say that not just PCs, but also tablets would take a hit this year . Additionally, mobile phones will be hurt by pricing pressures and a significant reduction in first-time buyers in China.

Guidance Cuts : After AMD lowered guidance citing weak PC demand and a gross margin hit from the FinFET transition, shares dropped 14%. Related stocks like Intel, NVIDIA and Micron (which offered disappointing guidance for the next quarter) all headed lower. Networking infrastructure chipmaker QLogic also lowered guidance due to weaker demand and inventory accumulation in storage and server markets sending shares down over 21%.

Job Cuts : But wait, there's more. Earlier this year, Intel said that the PC market weakness necessitated an R&D budget cut of $300 million, which would enable it to meet its full-year guidance. And the company will get this done through job cuts. Of course, Intel may not end the year with a smaller house considering that it also picked up Altera on the way.

Next is Microsoft MSFT , which doesn't see the sense in pursuing many disparate businesses, effectively transferring ad sales (and some staff) to Verizon's AOL and then deciding to offload another 7.8K people related to its phone business (that's in addition to the 18K over the past year).

China Exposure : Chinese stocks or companies operating in China will offer a roller-coaster ride as the Chinese stock market's historic bull run first hit a correction and was then rescued by government initiatives (and the story could repeat itself any number of times). So companies like Alibaba are being thrashed.

It's a pity, considering Alibaba's dominant position in an important sector of the world's second largest economy, its many strategic deals with local players and solid international growth plans. Other companies with exposure include Apple and a host of chipmakers such as Marvell, Avago and Broadcom. Since China has grown into a major consumer of technology, it remains on the radar for most players.

Is It All Bad News?

By the time you've waded through all that stuff, you get the feeling that it's all doom and gloom for technology. But that's not exactly true.

Technology is an enabler, i.e. it offers and maintains the pipes (or funnels) that get you information, entertainment and goods. Since it's pretty much all-pervading, there's bound to be good stuff too-

Cloud Computing : If there's been talk about PC market concerns, there's been an equal amount of talk about cloud computing and the transfer of corporate workloads to the cloud. The Computer World study for 2015 shows that spending on security technologies will increase 46% this year, cloud computing 42%, business analytics 38%, enterprise storage 36%, and wireless and mobile 35%.

Cisco's 2013-2018 forecast for SaaS (when an application is provided through the cloud), PaaS (when a platform is provided for software development in the cloud) and IaaS (when entire IT infrastructure including server, storage, etc is provided through the cloud) indicates double-digit growth for all categories through the forecast period. Forrester says that integration, storage management and database management will be top spending categories in 2015 with global enterprise software spending reaching $620 billion this year.

The IT budget squeeze is turning out to be the primary driver of the growth in cloud computing. And here are the winners: Amazon's AWS, Microsoft's AWS for IaaS, Red Hat and Heroku for PaaS, Salesforce CRM and Insightly for SaaS, Box BOX and Google Drive for storage, and Citrix and VMware for virtualization of the desktop (DaaS).

Social Networking : The first name that comes to mind here is Facebook, as the social networking company defines the sector. Facebook has a huge user base and is successfully driving initiatives to increase prices. Growing the user base is its longer-term challenge and a good problem to have. Twitter is lost in the shadows of its more illustrious peer and the company is struggling with new products and alliances. The story hasn't changed much for these players.

Travel : This segment is hot with Expedia getting grid of its loss-making China unit and cementing its leadership position in the U.S. with the Travelocity and Orbitz acquisitions. Priceline has issues in the domestic business but a good history of earnings surprises despite significant currency fluctuations. Chinese companies Ctrip and Qunar also look good.

Ecommerce : This is a very hot segment with many smaller players like Petmed and Blue Nile making their mark. But don't discount Amazon and eBay, both of which have started surprising positively.

Don't Forget Apple

Apple has single-handedly raised tech sector results and it may be expected to do it again. The past week has seen Apple shares sluggish as UBS and FBR analysts raised concerns about China. In the last quarter, Apple sold more iPhones in China than in the U.S. for the first time, so the China market is growing in importance. A slowdown in the Chinese economy or sell off in the Chinese stock market could affect disposable incomes and therefore iPhone sales according to the analysts.

But Gartner has said that smartphone sales in China will be more dependent on product quality than first-time adoption, which doesn't sound bad for Apple. Moreover, the iPhone maker has been taking share in many Samsung strongholds, including its home country Korea. Apple has also started selling watches and the BOM breakdown showed strong margins for Apple. It's also the only U.S. company that continues to make profits on computer sales.

For Apple in particular and the tech sector in general, falling stock prices are not such a bad thing. As valuations get more sensible, there could be opportunities to build position.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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