We're now into the heart of earnings season. Some big names have already reported, but many are still to come. This week ahead will be very busy, with a number of non-earnings events scheduled as well, including Apple's (AAPL) expected iPad launch event. Today, I'll preview the week ahead, looking at some key names to watch, with an extra focus on the biggest earnings event of the week. That distinction belongs to Microsoft (MSFT).
Perhaps the biggest earnings event of the week that I'll be focusing on will be Microsoft. Microsoft now trails Google (GOOG) by about $45 billion in market cap, but that gap could narrow with a solid report. Microsoft hasn't been one to deliver lately, as all four fiscal quarters last year saw revenue misses when the company reported. Luckily for the company, its fiscal fourth quarter report in July was so bad that analysts have taken down estimates tremendously, almost to the point where you might think it couldn't miss.
Current estimates for fiscal Q1 stand at $17.78 billion for revenues, growth of 11.1%, and earnings per share of $0.54, up a penny from last year's period. As a point of reference, when Microsoft reported in July, Q1 estimates stood at $18.92 billion, 18.2% growth, and earnings per share of $0.68. You might even notice that since my article linked above, revenue estimates have come down by another $50 million, and earnings per share numbers are down another penny. Analysts cutting their estimates into earnings is something we've seen a lot in recent quarters with Apple, so it's a little surprising to see it happen to Microsoft this time around. Perhaps analysts don't want to see Microsoft miss revenue estimates again.
There are a couple key items that will be watched very closely, other than the headline results obviously. First, Microsoft needs to prove that sales of Surface tablets are doing better. Remember, Microsoft took a $900 million charge in its last quarter. The second thing, one I'll be really interested in, is balance sheet and cash flow information, which will include information about shares repurchased during the quarter. Microsoft announced a large dividend increase and new buyback program in September. However, its US cash balance, the only pool of resources from which it can pay dividends and buyback stock, was fairly low, representing about 10% of its overall cash pile. Will Microsoft take out debt for more buybacks or will it slow down the buyback, depending on cash flow? That's a key question. Additionally, investors will be looking for the announcement of a new CEO. While the board wants to get this done by the end of the year if possible, I don't think we'll get the announcement this week. The final item to look for is a discussion about the Nokia (NOK) deal. Any more information on that would be helpful.
Microsoft shares closed just under $35 on Friday, about $1.50 from the 52-week high. Shares have recovered from two falls now, the first one after the last earnings report, and the second one after the Nokia deal. With shares elevated, this report could have the perfect setup for the "buy the rumor, sell the news" event where shares rally into the report and sell off on the report, regardless of the report. Expectations have come way down, so a beat will be expected, but will it be enough to keep shares propped up? I'd be willing to take the short side, but only if that position was hedged. We saw Google soar on a so-so report last week, so anything is possible here.
I won't spend a ton of time on Apple, since I'll discuss the name in a lot more detail later this week with my official Apple earnings preview. This will be a big week for Apple though, with the expected launch of several new products. Current expectations call for a 5th generation iPad, a retina iPad mini, and the new Mac Pro to be unveiled, as well as OS X Mavericks to be shown off. These products will have a tremendous impact on Apple's fiscal Q1 holiday quarter, which should be the largest sales quarter in Apple's history. A few key items that I'll be looking at are the price points for the iPad models, the date they will go on sale, and any potential unit sales data. Remember, it was at last year's iPad showoff that Tim Cook spewed unit sales data that caused a bunch of panic among Apple analysts right before its quarterly report. This week will be the second stage in Apple's fiscal 2014 launch period, which will form the basis for the fiscal year.
The streaming giant will have a lot to prove when it reports Monday afternoon, given the stock's all-time high was reached on Friday. Current estimates call for 21.6% revenue growth to $1.10 billion, and earnings per share of $0.49 (against $0.13 in Q3 last year). Remember, Netflix's core streaming business is growing much faster, as the DVD business is in decline. That's a key point, because Netflix stopped providing DVD revenue guidance, so we don't have a guidance range there. Obviously, investors will be looking at Netflix's sub growth and guidance. I'll also be looking to see how domestic streaming margins are doing, and how the balance sheet is holding up. Netflix shares are at an all-time high, and the company has to prove itself to more than just the regular investor. Carl Icahn might be thinking of selling his shares, which would cause this stock to drop. Netflix needs to keep Icahn in the game. To do this, Netflix will need to beat on all fronts and issue decent guidance to keep shares at these lofty levels.
Along with Microsoft, Amazon will be another big name reporting Thursday afternoon. Investors will be looking to see how Amazon's revenue growth is holding up, and if the company can actually produce a profit. Current estimates call for revenue growth of 21.4% to $16.77 billion and a loss of 9 cents per share. The company lost 60 cents a share in the year ago period. Amazon also hit an all-time high on Friday, so expectations will be high. The company has not been known for great results and guidance in recent quarters, but yet the stock keeps going up. Eventually, the music will stop, but when will that be? Lately, the trend has been to short Amazon right before the close, cover your position when the stock drops on bad headline numbers, and go long right then as well. It will be interesting to see if that works again if Amazon disappoints, which I think it will.
Deckers Outdoor (DECK):
The UGG maker will also report on Thursday afternoon, making it a very busy day for me. With a cold winter forecast but many thoughts that the brand is a fad, this is a crucial earnings report for Deckers. Last year, Deckers promised a big holiday season and it didn't happen. This year's holiday sales figure is supposed to be even higher. Current estimates call for just 2.5% revenue growth to $386 million and a profit of $0.72 (versus $1.18 a year ago). I'm not that concerned with Q3 numbers, unless there is something really shocking. I'm more concerned with Q4 guidance, with estimates calling for 14% revenue growth to $704 million and a profit of $3.88 (compared to $2.77 a year ago). Deckers is actually forecast to lose money for the first three quarters of the year, so Q4 is expected to show more profits than the full year figure. Deckers' guidance will need to be strong. This company does produce a fair amount of cash, which has allowed them to buy back a lot of stock lately. But results have not been spectacular, which is why short interest is around 30%. If Deckers has a huge Q3 beat and great Q4 guidance, a short squeeze is possible. But if the company disappoints again, this stock will be hit hard.
iShares 20+ Year Treasury Bond ETF (TLT):
There will be more this week than just earnings and an Apple product launch event. Now that the government is re-opening, we'll start to get some economic data that was not originally revealed as scheduled. The September employment report will be out on Tuesday, with a full week of other data as well. This data will be very important, because we do have a Fed meeting the following week. I threw the iShares 20+ Year Treasury Bond ETF up as a name to watch, as it will be interesting to see how the economic data impacts interest rates. If the data is weak, and the government shutdown really had a decent size impact, look for QE to be extended for a bit. That could potentially help bonds, and maybe gold as well.
This is going to be a very busy week for the markets. A number of high profile names are reporting earnings, including Microsoft and Amazon. Apple will launch a new set of products, which will be some of the hottest holiday gifts. Netflix and Deckers, two of the most debated momentum names, will also report and fuel bull/bear cases. We'll also get a fair amount of economic data, a week before the Fed meeting. If you were looking for a quiet week, this isn't the week for you.