Tech Earnings Are Coming. 6 Reasons to Brace for Even More Pain.

Tech Earnings Are Coming 6 Reasons to Brace for Even More Pain

We’re now just days away from what could be one of the most important tech earnings periods in years. Brace for trouble.

The crosscurrents are fierce. Interest rates are high, and headed higher. Inflation hit a multidecade peak. Consumer spending has slowed. And fears of a recession are growing. Meanwhile, we’re still working our way through the pandemic; supply-chain issues remain; the dollar has hit multiyear highs against European and Asia currencies, creating a foreign-exchange drag on earnings; and the Russian war on Ukraine rages. All of that triggered the worst first half by the U.S. stock market in more than half a century.

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As I noted last week, analysts are rushing to cut estimates for tech stocks of every variety, cognizant that consensus forecasts don’t reflect the blizzard of recent ugly financial and geopolitical developments. You are going to hear talk in coming weeks that second-quarter results—and what will undoubtedly be soft guidance for the rest of the year—could serve as a “clearing event” and set the stage for improved market performance later. But keep in mind that there are many shoes left to drop, and more losses to absorb.

Here are six key trends to watch in the weeks ahead:

Estimates are too high: Ted Mortonson, technology desk sector strategist at Baird, thinks we’ll get soft September-quarter guidance across the board, with most Street estimates “stale,” unreflective of current economic conditions. He sees risks of guide-downs from megacaps like Apple AAPL –0.49% (ticker: AAPL), Intel INTC –1.06% (INTC), Meta Platforms META –3.68% (META), and Microsoft MSFT –0.61% (MSFT). The Satori Fund’s Dan Niles thinks that results and guidance will be “a hell of a lot worse than people are thinking.” He points to troubling initial evidence, including guidance cuts from Microsoft, Micron Technology MU –1.29% (MU), and Target (TGT). Says Niles: “It’s how fast this stuff is changing that should have people worried.”

PC trouble: One disturbing element in memory chip maker Micron’s recent earnings report was its reduced forecast for 2022 PC unit demand. Micron sees a 10% drop. While Dell Technologies (DELL) and HP Inc. (HPQ) have seen consumer PC demand weaken in recent quarters, both held out hope that corporate PC demand would remain buoyant. But that now seems unrealistic. Gartner (IT) sees consumer PC units off 13% this year—but also a 7% drop in business PCs. Gartner also sees a 9% drop in tablet shipments and a 7% dip in cellphones. Expect new data on PC demand when Taiwan Semiconductor (TSM) reports results on Thursday; attention will then turn to results late this month from Intel, Advanced Micro Devices (AMD), and Microsoft. I remain a long-term Microsoft bull, but it already took the unusual step of reducing guidance for the quarter to reflect currency headwinds; the soft PC market could trigger a rare earnings miss.

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Stale chips: Baird’s Mortonson thinks the “semi trade is in real trouble,” noting that Micron’s guidance miss for its August quarter was “much greater than the Street was thinking.” He suspects that kind of dramatic shortfall could be a common theme in second-quarter earnings and third-quarter guidance in chips and that we could get another 15% to 20% decline in chip stocks from

Beware of cloud bursts: The big public clouds—Amazon Web Services, Microsoft Azure, and Google Cloud Platform—remain the best in enterprise computing. But large swaths of the economy are reducing spending in fear of a slowdown. Netflix (NFLX) has been cutting heads. Meta is slowing hiring. Snowflake ’s (SNOW) last quarter came in light, as a few customers cut back. Venture-backed start-ups are pulling back as capital gets harder to find, with markets for special-purpose acquisition companies and initial public offerings dead, and private valuations falling. Key markets like video streaming, e-commerce, and online media have problems.

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Caught in the Net: Piper Sandler analyst James Fish noted that internet traffic growth has slowed, reflecting reduced activity on streaming and e-commerce sites. There are problems across the consumer internet, and second-quarter results may show them to be worse than you think. We’ll get a first peek when Netflix reports on July 19; there are worries that net subscriber losses will be larger than the two million that Netflix has projected, as competition intensifies, and consumers cut budgets. Amazon.com ’s (AMZN) online stores business is expected to shrink 2% in the quarter, after a 3% drop in the March quarter, but there’s risk of a wider decline. Meta’s second quarter could show zero growth, for the first time ever. Evercore ISI internet analyst Mark Mahaney made “material” estimates cuts across the sector, citing “signs of softening consumer demand and recession risk.” His biggest focus is on companies reliant on discretionary consumer spending and brand advertising, like Airbnb (ABNB), DoorDash (DASH), Etsy (ETSY), Pinterest (PINS), and Peloton Interactive (PTON). Niles points out that almost two-thirds of ad spending is now online, a significant vulnerability as the economy slows.

Recession fears: Paul Meeks, portfolio manager at Independent Solutions Wealth Management, thinks the one question you will hear on earnings calls will be about a recession. “The key question is, if we’re in a recession, what’s the risk, what’s the absolute worst case for your numbers,” on revenue, cash flow, and earnings per share? “No CEO will directly answer, but every company must talk about it. If you don’t significantly lower guidance, then no one will believe your forecast. Rip off the damn Band-Aid. Kitchen-sink this thing!”

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