I've recently come to the realization that not all tech stocks are the same. I understand that this is no real revelation, but what I mean is, just as in our "class-system society," Wall Street has also established an indirect and unspoken "class-system" for stocks - one that goes a little farther than what we understand as sectors. Said differently, there are classes within classes.
When does a tech lose its tech status?
As January ended, delivering one of the best months in quite some time, I've sat down recently to make my stock target projections based on the rash of recent earnings announcements. What I have realized while reading the various publications as well as price targets from the analyst community is that most technology stocks share a certain quality of being (for the most part) high growth. It starts with the usual suspects of names such as Apple (AAPL), Google (GOOG) as well as Amazon (AMZN) having delivered such high performance numbers on a quarter by quarter basis. The vocabulary used to describe their expectations and performance targets are different from other tech names.
For example, the words "quarter-over-quarter" or "sequential" are standard terms used during each discussion of comparison. However for other tech names such as Cisco (CSCO) and Microsoft (MSFT) you hear the turgid use of "year-over-year" or "annual basis." I am realizing that this is often Wall Street's way of saying, we are no longer enamored with your prior performance and don't feel management is capable of inspiring growth. The question is, at what point does a technology name lose its technology status?"
To answer this question, let's take a look at the recent earnings of three of the aforementioned giants within the sector. However, the distinction here is not necessarily their respective stock per se nor the company themselves, but that of Wall Street's reaction toward meeting, exceeding or as in the case of Google and Amazon, falling short of expectations.
Apple's earnings
For the quarter ended Dec. 31, Apple reported net income of $13.1 billion, or $13.87 per share, compared with net income of $6 billion or $6.43 per share for the same period the previous year. The company's iPhone sales come in at more than 37 million and profit more than doubled for its latest quarter, surging past analyst estimates. Revenue jumped 73% to $46.3 billion. Analysts were expecting earnings of $10.08 per share on revenue of $38.85 billion for the quarter, according to consensus forecasts from Thomson Reuters. The company said it shipped 37.04 million iPhones for the quarter - a number that surpassed the average analysts' forecast for just more than 30 million units sold.
Market's reaction
As highly anticipate as the call was, remarkably it did not disappoint. The day prior, the stock traded down $7 to close at $420 and opened on the following day post earnings up $34 to $454.
Google's earnings
For a company that seemingly has a mission of putting smiles on people's faces, it sparked several frowns recently with its Q4 full year earnings results - prompting its shares to drop 9% upon the release and falling below $600. The company reported the highest revenue total that it has ever had in a single quarter at $10.6 billion. It seems the concern for analysts was what it reported net revenue of $8.13 billion versus the expected $8.4 billion. It didn't matter that the company would likely have met expectations had it not been for a deduction in advertising commissions.
The company also disappointed in its profit growth numbers. The concern is that Google is spending too much money by virtue of the 35% increase in operating expenses. But it costs money to grow - particularly as Apple and now Amazon strive to secure the remaining pieces of the mobile devices market.
Market's reaction
For Google, while no stranger to volatility, actually saw its stock trade up $7 ahead of its announcement to $639 and then plummeted as much as 9% the following day as concerns surfaced regarding its spending.
Amazon's earnings
On Tuesday, the company reported fourth quarter numbers that included a 57% decline in profit. Amazon said net income for the quarter ended in December fell to $177 million or 38 cents a share, from $416 million, or 91 cents a share in the same period a year earlier, while revenue climbed 35% to $17.43 billion. The disappointment came as Wall Street analysts were expecting the company to report earnings of 17 cents a share for the quarter and $18.25 billion in revenue. During the conference call, Tom Szkutak, the company's CFO, defended Amazon's perceived lack of fiscal control by suggesting that it must move aggressively to take advantage of new opportunities.
Market's reaction
For Amazon, the stock closed ahead of earnings up $2 to $194 and dropped as much as 11% in the following sessions. However, unlike Apple and Google, the story is a bit different in that expectations have always been high and the stock has always been relatively expensive. So the reaction to its earnings miss was not much of a surprise by nature of its 100 P/E.
When growth expectations for tech fades
By contrast, Microsoft, which lowered expectations considerably a week ahead of earnings by informing analysts that the Thailand flood of last year had impacted PC shipments, reported earnings that not only topped analysts' estimates, but did so by a respectable margin. It posted fiscal second quarter earnings excluding items of 78 cents per share, up from 77 cents in the year-earlier period. Net income was $6.62 billion, down slightly from the $6.63 billion a year ago. Revenue was $20.9 billion, a 5% increase from $19.95 billion annually, helped by its Office, server software as well as Xbox businesses.
While the numbers were good, they were far from sexy and as mentioned the stogy "yearly" descriptions are everywhere. And as far as the market's reaction, it was ... "ehh so-so." The stock closed ahead of earnings at $28.23 and traded up the following day 5% - far from a typical tech reaction post earnings.
What's in store for Cisco?
This is the question that will (to me) validate if the market still indeed honors its tech status. The company will report its fiscal year 2012 financial results next Wednesday. I have said that it has resurrected itself and is once again vying to regain its status not only as a tech, but also as a darling on Wall Street.
In its Q1 fiscal 2012 earnings report, excluding some costs, profit climbed to 43 cents a share in the quarter ending October 29. Analysts on average had predicted 39 cents. The company topped projections with its second quarter forecast. First quarter net income fell to $1.78 billion, or 33 cents a share, from $1.93 billion, or 34 cents, a year earlier. Sales rose 4.7% to $11.3 billion in the period, compared with an estimate of $11 billion. Cisco's gross margin narrowed to 62.4% last quarter, excluding some costs that beat the average estimate of 61.3%.
Unlike Microsoft's report there were a lot of "quarterly" terms used as comparison, but just as Microsoft, the stock failed to make any significant move suggesting that expectations were where they should be.
Summary
The common theme for growing tech stocks is exactly that, they are growing. And with growth comes high growth expectations. Should the fact that neither Microsoft nor Cisco are growing as Apple and Google have forced the market to look at them differently. Are they in a separate class of techs or are they considered techs at all? It is also interesting that both Microsoft and Cisco pay a dividend while Apple and Google do not. Not suggesting that there is any truth to the notion that dividend payers can't grow, I'm just suggesting that it is interesting. For all of you asking for Apple and Google to pay-up, be careful what you wish for.
