The Q1 earnings cycle is in full swing, with a number of tech companies, including Facebook and Amazon AMZN, slated to report their quarterly numbers this week.
According to the Earnings Preview dated Apr 20, technology, along with the finance sector, will bring in more than 40% of the S&P 500 index’s total earnings this year. Per the report, Q1 total earnings for the tech sector are projected to be up 20.9% on 11.5% higher revenues.
We note that the technology sector has been a robust performer over the past year. The sector has been benefiting from the rising demand for cloud-based platforms, growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, autonomous cars, advanced driver assisted systems (ADAS) and Internet of Things (IoT) related software.
The sector is also poised to benefit from President Trump’s pro-business policies, including tax cuts, deregulation and outlays on infrastructure. Furthermore, Gartner’s latest prediction on IT spending bodes well for the sector. The research firm estimates worldwide IT spending to increase 6.2% year over year to $3.74 trillion this year, breaking the earlier highest ever mark of $3.71 trillion in 2014.
Not All Companies Poised to Impress
Though the overall tech sector is poised to shine in the quarter to be reported, this does not ensure earnings beat for all firms in the space. It should be noted that a company’s earnings outperformance is dependent on the overall business environment, as well as management’s ability to implement operating and strategic plans.
In other words, a company might perform poorly despite a favorable business environment if it fails to capitalize on the opportunities due to lack of execution.
Notably, our research shows that the chance of beating earnings estimates is high when a stock carries a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) and has a positive Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Let’s see what’s in store for these four tech stocks, all of which are expected to release quarterly numbers on Apr 26.
Microsoft Corporation MSFT, a broad-based technology provider, is set to release third-quarter fiscal 2018 results. The company is likely to beat estimates as it has a favorable combination of a Zacks Rank #3 and an Earnings ESP of +0.90%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Microsoft’s revenues is pegged at $25.71 billion, representing a 9.1% year-over-year increase. The consensus estimate for earnings is pegged at 85 cents, reflecting an increase of 16.4% from the year-ago reported figure.
The company’s Azure Cloud Platform is expected to have majorly contributed to its growth. In the last few years, Microsoft has strengthened its position in the public cloud-service space through acquisitions and data-center expansions. Notably, revenues from Azure were up a whopping 98% in the fiscal second quarter, on a constant-currency basis. This trend is likely to have continued into the to-be-reported quarter as well. Additionally, strong adoption of Office 365 and Windows 10 is anticipated to have driven the fiscal third-quarter revenues. (Read more: Microsoft's Q3 Earnings to Benefit from Azure Growth)
The world’s largest semiconductor company, Intel Corporation INTC, is scheduled to report first-quarter 2018 results. The stock carries a Zacks Rank of 3 and has an Earnings ESP of -0.74%.
Intel’s earnings report will still serve as an important bellwether for the entire technology sector, but the stock has struggled to gain momentum, as investors have become increasingly concerned with this chipmaker’s competition. Of late, the company has been sensing pressure from the likes of NVIDIA NVDA and Avanced Micro Devices AMD. Nvidia’s AI processors are already at the forefront of the booming AI industry, while AMD has doubled down on its server chips. And both of these companies compete with Intel in the ever-important gaming segment.
However, we anticipate the company’s impressive growth at the data-center group segment to have cushioned its top- and bottom-line performance in the quarter. Increasing demand for data storage and high-performance networks has been propelling this segment’s growth. As the number of smartphones and Internet-connected devices increases, along with the rise of AI and cloud computing, Intel’s data-center business will expand. (Read: Intel to Report Q1 Earnings: What's in the Cards?)
The Zacks Consensus Estimate for Intel’s revenues is pegged at $15.05 billion, representing a 1.7% year-over-year increase. The consensus estimate for earnings is pegged at 71 cents, reflecting an increase of 7.6% from the year-ago actual figure.
VeriSign, Inc. VRSN is set to report first-quarter 2018 results. The company is likely to beat estimates as it has a favorable combination of a Zacks Rank #2 and an Earnings ESP of +2.83%. The Zacks Consensus Estimate for VeriSign’s revenues is pegged at $298 million, representing 3.3% year-over-year growth. The consensus estimate for earnings is pegged at $1.06, indicating rise of 10.4% from the year-ago reported figure.
VeriSign holds a prime position in the highly regulated .com and .net domain industry. The company is the exclusive registrar of the .com, .net and .name domains per its agreements with The Internet Corporation for Assigned Names and Numbers (ICANN). Per the company’s agreement with ICANN, the annual fee for a .net domain name registration has been increased from $8.20 to $9.02, effective Feb 1, 2018. We believe increasing domain-name registration, along with price hikes for domain names, to have bolstered revenues in the quarter. (Read more: What's in the Cards for VeriSign in Q1 Earnings?)
Maxim Integrated Products, Inc. MXIM is set to report third-quarter fiscal 2018 results. The stock carries a Zacks Rank of 4 and has an Earnings ESP of +1.58%. However, the company’s top and bottom lines are anticipated to record significant year-over-year improvement.
The Zacks Consensus Estimate for VeriSign’s revenues is pegged at $640.6 million, representing a 10.2% year-over-year gain. The consensus estimate for earnings is 69 cents, indicating 23.2% growth from the year-ago reported figure.
Maxim’s well-diversified product portfolio is helping the company perform well in all its end markets, especially in the automotive and industrial sectors. Moreover, it is aiding the company to win clients and expand globally. However, weakness in the smartphone market and high dependence on Samsung poses significant threat to the company’s revenues from the consumer end market. (Read more: Can a Diverse Portfolio Lift Maxim's Earnings in Q3?)
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