Weekly Preview: Earnings to Watch (BABA, CSCO, NVDA, ROKU)
Stocks ended Friday lower, with both the Dow Jones Industrial Average and the S&P 500 closing out the week on a downbeat note, pressured by fears of rising interest rates and rising inflation. New data released on Thursday shows that U.S. inflation is at a 40-year high of 7.5%. Federal Reserve officials, however, are holding out hope that the peak may be near.
Appearing on CNBC on Wednesday, Atlanta Fed president Raphael Bostic said, ”There is some evidence we are on the cusp" of inflation that begins to ease perhaps by midyear. This seems to echo the sentiment shared by Cleveland Fed president Loretta Mester who recently said she expected inflation to ease this year as the Fed steadily tightens credit. While Wall Street economists have been expecting a quarter-point hike for March, the number of rate increases have varied, depending on who is being asked.
Citigroup recently predicted five 25-basis-point rate hikes in 2022, starting next month. In the meantime, it hasn't helped that economists are seemingly trying to one-up each other when it comes to predicting how many times the Fed will raise rates in the calendar year. That number has ranged from three rate increases to as many as eight. And the uncertainty continue to impact stocks, creating continued volatility. On Friday the Dow Jones Industrial Average declined 503.53 points, or 1.43%, to close at 34,738.06.
The S&P 500 Index gave up 85.46 points, or 1.90% to close at 4,418.62, while the tech-heavy Nasdaq Composite Index declined 2.78%, losing 394.49 to end the session at 13,791.15. For the Nasdaq, the FAANGs — Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOG , GOOGL) — all closed down by more than 3% except for Apple, which ended 2.02% lower.
With the consumer being the main driver of the economy over the past two+ years, inflationary pressures will force investors to assess stock prices and whether companies that rely on consumer spending can continue to thrive. If higher prices of goods and services will take a strong bite out of consumer spending, stocks will suffer. Aside from investors fears about inflation, supply chain challenges continue to pressure revenue growth estimates.
But as stock continue to fall, we are approaching oversold conditions. There are now tons of under-appreciated buying opportunities that can give portfolios an immediate boost.
As for earnings, here are the names I’ll be watching this week.
Alibaba (BABA) - Reports before the open, Tuesday, Feb. 15
Wall Street expects Alibaba to earn $2.54 per share on revenue of $38.68 billion. This compares to the year-ago quarter when earnings came to $3.35 per share on revenue of $33.66 billion.
What to watch: What will it take for Alibaba stock to rebound? It appears that SoftBank’s (SFBQF) recent assurance that it will not sell its stake in the company has established a near-term floor on the stock. Alicia Yap, analyst at Citigroup, who has a $216 price target on Alibaba, noted that SoftBank's stake in BABA is close to 24%. But is that enough to get new investors interested? Last week, while citing a “challenging business quarter,” Mizuho Securities analyst James Lee cut his price target on Alibaba. Though he maintained his buy rating on the stock, Lee cut his price target to $180 from $215. From current levels of around $123, that still represents more than 46% potential upside. Alibaba has struggled through corporate governance issues and a rocky political standing in China, which has impeded its growth. Other analysts, such as Barclays’ Jiong Shao who listed Alibaba as a “top pick,” has come to the BABA’s defense, saying Chinese tech companies are "too important to be ignored.” Shao initiated the stock as Overweight with a price target of $275 per share, suggesting 125% upside from current levels.
Cisco (CSCO) - Reports after the close, Wednesday, Feb. 16
Wall Street expects Cisco to earn 81 cents per share on revenue of $12.65 billion. This compares to the year-ago quarter when earnings came to 79 cents per share on revenue of $11.96 billion.
What to watch: Cisco stock has declined 13% so far this year, including an 11% drop in the past thirty days, trailing the S&P 500 index in both spans. And when expanding that horizon by six months, shares have lost almost 2% of their value, while the S&P 500 index has risen 1.5%. Given the company’s strong dividend yield of 2.6%, Cisco now presents excellent value and strong defensive qualities ahead of the economy re-opening. Cisco continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues. The company is investing in ways to grow its recurring revenue from subscription-based software and services as it shifts away from its core business of selling network switches and routers. By 2025 the company said it it expects subscription revenue to account for 50% of total revenue, which would be a six percentage point increase (from 44%) in fiscal 2021. But for that to matter, the market will want Cisco on Wednesday to show that it can pivot quickly to new growth businesses to offset the revenue declines in the legacy segments. The question management must answer is whether Cisco can execute on these growth opportunities to generate value.
Nvidia (NVDA) - Reports after the close, Wednesday, Feb. 16
Wall Street expects Nvidia to earn $1.22 per share on revenue of $7.42 billion. This compares to the year-ago quarter when earnings came to 77 cents per share on revenue of $5 billion.
What to watch: Citing "significant regulatory challenges,” Nvidia's planned acquisition of Arm from SoftBank has ended. This $40 billion deal which has been in the works since September 2020 would have been the largest ever in the chip sector. The deal would have given Nvidia control over designs that rival chip companies such as Intel (INTC), AMD (AMD) and Qualcomm (QCOM) rely on to develop their own competing chips. Estimates suggest that roughly 70% of the global population is using products powered by Arm’s technology every day. While it’s hard to say Nvidia is better off without Arm, NVDA stock however has become more attractive after falling as 32% from its peak. And amid the recent punishment in tech, NVDA stock has also fallen some 40% since its November all-time high. Some of that decline has also been due to the canceled Arm deal. However, when thinking about its reach in the datacenter and AI computing, Nvidia has long demonstrated its innovative qualities in graphic chips and computing technology. What’s more, with the recent excitement surrounding Meta's Platform’s (FB) advancements with the Metaverse, Nvidia’s graphic chips it will be in high demand. On Wednesday investors will nonetheless want Nvidia to highlight these strengths.
Roku (ROKU) - Reports after the close, Thursday, Feb. 17
Wall Street expects Roku to earn 7 cents per share on revenue of $896.54 million. This compares to the year-ago quarter when earnings came to 49 cents per share on revenue of $649.89 million.
What to watch: Is now a good time to buy Roku stock? Shares of the video streaming specialist have been clobbered over the past several weeks, losing some almost 60% of their value in six months, including a drop of 10% in the past thirty days, trailing the S&P 500 index in both spans. With shares down 27% year to date, Roku screams strong value. In partnership with Nielsen Holdings (NLSN), Roku recently launched Digital Ad Ratings audience guarantees on its OneView ad platform which will allow Roku to sell guaranteed demographic impressions to its ad partners. According to Roku, “OneView users can now choose a specific age and gender demographic, like adults ages 18 to 49, and pay only for the ad impressions that reach their target audience.” Already benefiting from a rising trend in advertising dollars that are shifting from linear television to streaming, this means Roku can now guarantee that its ad customers can target only the demographic that meets their criteria, allowing the company to raise ad prices if it chooses. Given these factors, Roku stock appears more appealing on this recent drop. On Thursday the company must do its part to demonstrate that value.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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