Technology stocks saw a stronger-than-anticipated start to fourth-quarter earnings. Per the latest Earnings Trend, the sector is now expected to report earnings growth of 7.3%, much better than 4% expected at the start.
However, growth rate has significantly declined from the last couple of quarters. This is primarily due to lackluster results from Apple and a number of chipmakers, including Texas Instruments and Intel.
Apple reported dismal iPhone sales, primarily due to sluggish demand in Greater China and fewer upgrades in developed countries. Being Apple suppliers, weak iPhone sales don’t bode well for a number of semiconductor companies, like Qorvo, Skyworks and Lumentum.
Texas Instruments stated weak demand from Chinese smartphone manufacturers in the quarter. Meanwhile, chip-maker NVIDIA slashed its top-line guidance on macroeconomic weakness in China.
Moreover, Intel’s warning over sluggish cloud spending doesn’t bode well for the sector.
Semiconductor Growth Moderates
Manufacturers of semiconductors, which are the building blocks for most of AI and IoT, reported impressive 2018 numbers. Per the Semiconductor Industry Association, global semiconductor sales totaled $468.8 billion in 2018, up 13.7% over 2017.
However, month-over-month growth continued to decline. Global sales in December were $38.2 billion, down 7% from the November figure. Moreover, fourth-quarter sales declined 8.2% sequentially to $114.7 billion.
Notably, tariff imposition owing to the U.S.-China trade tussle has been taking a toll on chipmakers for a while now. China happens to be one major market for semiconductors, while the United States is the biggest semiconductor manufacturing country.
Moreover, CPU shortage hurt PC shipments in the fourth quarter, per Gartner. The market research firm also blamed sluggish consumer demand during the holiday season for the weak sales.
According to IDC, fourth-quarter PC shipments declined due to economic tensions between China and the United States along with “shortfall of Intel CPUs.”
Xilinx, Facebook, Google Shine Bright
Earnings beats from semiconductor stocks like Xilinix, Teradyne and Lam Research buoys optimism. Facebook reported solid fourth-quarter results on an expanding user base. More than 2.7 billion people now use its “Family” of services, which includes Facebook, WhatsApp, Instagram and Messenger, on a monthly basis.
Google-parent Alphabet also reported positive earnings and revenue surprises.
Despite headwinds, impressive results from these bellwethers hint at abound growth prospects for technology stocks.
Semiconductors are still expected to benefit from growing proliferation of high-performance robust chips across various domains — electronic gadgets to cars, planes and advanced weaponry.
Rapid adoption of AI, cloud, IoT, autonomous cars, advanced driver assisted systems, wearables, virtual reality/augmented reality devices presents massive growth opportunity. Furthermore, the accelerated deployment of 5G technology is encouraging.
Moreover, increasing video streaming has been driving user engagement that is, in turn, attracting advertising dollars. Notably, real-time analysis of user data supported by AI tools is helping advertisers target the right audience, which is boosting their return on investment.
Additionally, growing demand for smart speakers and connected devices, which are powered by AI, machine learning and deep learning, is a key catalyst.
How to Make the Right Pick?
With the existence of a number of industry players, finding the right technology stocks that have the potential to beat earnings can be a daunting task. Our proprietary methodology, however, makes it fairly simple for investors.
You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Given below are six technology stocks that have the right combination of elements to post an earnings beat this quarter:
San Francisco, CA-based Square SQ is set to report fourth-quarter 2018 results on Feb 27. The company has an Earnings ESP of +6.06% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Square has beaten the Zacks Consensus Estimate in the trailing four quarters, the positive average earnings surprise being 17.7%. The consensus mark for earnings has remained steady at 13 cents over the past 30 days.
Square, Inc. Price and EPS Surprise
Square, Inc. Price and EPS Surprise | Square, Inc. Quote
Santa Monica, CA-based Cornerstone OnDemand CSOD has a Zacks Rank #2 and an Earnings ESP of +2.55%. The company has surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the positive average earnings surprise being 28.6%.
Cornerstone is set to report fourth-quarter 2018 results on Feb 12. The consensus mark for earnings has remained steady at 22 cents over the past 30 days.
Cornerstone OnDemand, Inc. Price and EPS Surprise
Cornerstone OnDemand, Inc. Price and EPS Surprise | Cornerstone OnDemand, Inc. Quote
Cambridge, MA-based Akamai Technologies AKAM has a Zacks Rank #3 and an Earnings ESP of +3.24%. The company is scheduled to report fourth-quarter 2018 results on Feb 12.
Akamai has beaten the Zacks Consensus Estimate in the last four quarters, the positive average earnings surprise being 10.2%. The consensus mark for earnings has remained steady at $1 over the past 30 days.
Akamai Technologies, Inc. Price and EPS Surprise
Akamai Technologies, Inc. Price and EPS Surprise | Akamai Technologies, Inc. Quote
Another Cambridge, MA-based company HubSpot HUBS has a Zacks Rank #3 and an Earnings ESP of +2.28%. The company has beaten the Zacks Consensus Estimate in the trailing four quarters, the positive average earnings surprise being 90%.
HubSpot is set to report fourth-quarter 2018 results on Feb 12. The consensus mark for earnings has stayed at 30 cents over the past month.
HubSpot, Inc. Price and EPS Surprise
HubSpot, Inc. Price and EPS Surprise | HubSpot, Inc. Quote
Santa Clara, CA-based Palo Alto Networks PANW has a Zacks Rank #3 and an Earnings ESP of +0.97%. The company is set to report second-quarter fiscal 2019 results on Feb 26.
The Zacks Consensus Estimate for earnings has remained steady at $1.22 over the past 30 days. Palo Alto has beaten the consensus mark in the last four quarters, the positive average earnings surprise being 8.2%.
Palo Alto Networks, Inc. Price and EPS Surprise
Palo Alto Networks, Inc. Price and EPS Surprise | Palo Alto Networks, Inc. Quote
San Jose, CA-based Cisco Systems CSCO has a Zacks Rank #3 and an Earnings ESP of +1.28%. The company is set to report second-quarter fiscal 2019 results on Feb 13.
Notably, Cisco has beaten the Zacks Consensus Estimate in the trailing four quarters, the average positive earnings surprise being 3.5%. The consensus mark for second-quarter earnings has remained at 72 cents over the past 30 days.
Cisco Systems, Inc. Price and EPS Surprise
Cisco Systems, Inc. Price and EPS Surprise | Cisco Systems, Inc. Quote
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.
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