Information Technology Sector: Apple's Warning Weighs Ahead Of Q4 Reports

Includes: AAPL, AMZN, BABA, FB
by: JJ Kinahan

The information technology sector is often seen as a high-growth one, yet revenue growth estimates are on the low end heading into fourth-quarter earnings season.

Matching the high-level data, a few of the biggest names in the space have warned of a sales slowdown.

Here’s a look at what’s been going on in the tech sector ahead of company reports.

Normally the information technology sector is seen as a higher-growth one, but that doesn’t look to be the case this quarter around as Q4 earnings season gets underway.

As of Jan. 9 the blended revenue growth rate, a measure that includes analyst estimates and reported results, is just 1.7% year over year, according to Reuters data. That’s lagging every other sector except for utilities. Top-line results are expected to grow at a faster pace, with a blended earnings growth rate of 8.5% year over year, 7 th out of 11 sectors. Granted, some of that has been attributed to certain tech companies being shifted to the newly formed communications services sector.

Matching the high-level data, a few of the biggest names in the space have warned of a sales slowdown. Apple (AAPL) is often looked to as a barometer for the tech sector due to its size and global reach and it flashed warning signs recently that its fiscal Q1, which ended December 29, wasn’t going to be what the company or analysts had hoped.

In an investor letter, CEO Tim Cook, lowered AAPL’s revenue guidance for the quarter to $84 billion, 4.8% lower than last year’s results for the same quarter. Analysts had been expecting closer to $91 billion for the quarter and AAPL previously forecasted revenue in the range of $89 billion to $93 billion.

AAPL’s reasons for the lowered guidance read like a laundry list of the growing concerns that analysts have had about the broader tech sector. Cook cited challenges in emerging markets and said “we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” while noting that more than 100% of the company’s year-over-year revenue decline occurred in that region. In addition, Cook pointed to increased consumer uncertainty in China amid heightened trade tensions between the U.S. and China.

Guidance updates like this can often weigh on sector sentiment until results from more companies are released or other data emerges.

Bouncing Back into Q4. The S&P Technology Select Sector Index (IXT) has been bouncing back after a rapid decline through the last few months of 2018. The macro environment has been filled with uncertainty and Q4 earnings might provide some hard data that could play a part in whether or not the sector can make a sustained breakout out of its recent downtrend. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Tech-Filled Holiday Shopping

Ahead of the holidays, the Consumer Technology Association was forecasting that U.S. consumers would spend a record $96.1 billion on tech in the 2018 holiday season (October-December), good for a 3.4% year-over-year increase.

U.S. retail sales figures for December were supposed to be released by the Census Bureau today, but they have been delayed due to the shutdown, so the latest retail data is limited to November. Those results showed that U.S. retail sales had increased 4.2% compared to November 2017.

Over the holidays, there were some positive reports regarding consumer spending. Adobe Analytics reported that Cyber Monday was the biggest U.S. online shopping day ever, with consumers spending $7.9 billion overall. According to Adobe’s report, Take-Two Interactive’s (TTWO) Red Dead Redemption 2 video game, Nintendo’s (OTCPK:NTDOY) Switch console, and Dell and Apple (AAPL) laptops were some of the top-selling items.

For consumer-focused tech companies that generate a large portion of their sales during the holiday season, this quarter’s results are likely to be particularly important as they enter the slower time of the year.

Digital Payments and Tech

PayPal (PYPL) is a stock you might expect to find in the S&P Technology Select Sector Index (IXT). Mastercard (MA) and Visa (V), on the other hand, you might not. Regardless, stocks in the digital payments space had a banner year relative to the broader market. PYPL ended 2018 with a 13.88% return, while V and MA put up 15.22% and 24.19% increases. One of the biggest performers in digital payments was Square (SQ) with a 55% return, despite pulling back $45 from its October high of $101.15.

As cash usage decreases in many markets globally and some retailers go cashless, the digital payments space has been eyed by many analysts as one that could continue to grow for some time. Non-cash transactions are expected to grow at a 12.7% compound annual growth rate (OTCPK:CAGR) from 2016 to 2021, with emerging markets growing at a 21.6% rate, according to a 2018 report from Capgemini and BNP Paribas.

Even though analysts appear to be widely optimistic about the space, an overriding concern is valuation and that some companies will likely need to execute flawlessly to deliver on investor expectations. For example, forward P/E ratios for the companies mentioned above can vary from 26 to 90 today.

At the same time, any attractive market brings competition. Not only are companies like Amazon (AMZN), Facebook (FB), Alibaba (BABA) and Alphabet (GOOG, GOOGL) pursuing opportunities in the space, regional players like StoneCo (STNE) and Pagseguro (PAGS) abound as well.

Major Earnings Dates

The companies below cover most of the major constituents of the communications services sector and when they’re scheduled to report earnings:

IBM (IBM) after the close on Tuesday, Jan. 22 Lam Research (LRCX) after market close on Wednesday, Jan. 23 Intel (INTC) after the close Thursday, Jan. 24 Apple (AAPL) after market close on Tuesday, Jan. 29 ADP (ADP) reports before the open and Qualcomm (QCOM) after the close Wednesday, Jan. 30 Cisco Systems (CSCO) reports fiscal Q2 results after the close Wednesday, Feb. 13

Others, like Nvidia (NVDA), Advanced Micro Devices (AMD) and Salesforce (CRM), have yet to confirm their official reporting dates. Typically, many of the tech company reports fall in early to mid-February.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.