Today David joined Pimm Fox and Lisa Abramowicz on Bloomberg Radio to discuss Twitter. You can listen to the replay here.
Tech – 1Q17 Earnings Season Underway This Week
The U.S. technology sector reporting season kicked off last week with NFLX (Mon 1/17) and IBM (Wed 4/19). Results from both missed Street expectations and subsequent share performance has been mixed (NFLX to new highs, IBM sold off). Overall, the technology sector as a whole has been leading the broader market indices since the November 2016 U.S. Presidential Election. The technology sector would benefit from tax reduction to the extent it allows the repatriation of overseas profits. With technology stocks breaking out to new highs as the Nasdaq Composite vaults the 6,000 level, the upcoming 1Q17 results will offer a test of whether the sector can continue its market leadership position.
– On Thurs 4/27, AMZN, GOOGL and MSFT will release results. AMZN continues as the retail juggernaut displacing offline and online competitors alike, but at the cost of compressed profit margins with net income growth (+5%) lagging revenues (+21%). Nevertheless, trading at a 1.18x P/E/G ratio AMZN’s valuation relative to expected growth is not stretched. GOOGL is expected to show solid growth as it retains its dominant position in online advertising activity with solid revenue growth (+19%). However, expense growth is expected to lead to lower EPS (-2%). Trading at a P/E/G ratio at 1.27x, GOOGL is reasonably valued relative to expected growth. For MSFT, revenue growth is picking up (+7%) and profit margin expansion boosting EPS (+13%), but the valuation at 2.75x P/E/G ratio appears high. Management will need to highlight growing parts of its operations such cloud computing and the recent acquisition of LinkedIn to retain investor interest going into 2017.
– AAPL will release results on Tues 5/2. Despite the iPhone7 September 2017 launch, financial performance is expected to be flat as consumers are holding off upgrading smartphones until the expected September 2018 iPhone8 introduction. Meanwhile, with hardware sales showing only modest growth, we expect investors will focus on what growth potential AAPL can realize from its software & services sales through the App Store, a channel with potentially high margins off a revenue base in excess of $20bn. AAPL shares’ valuation at a 1.39x P/E/G ratio does not appear stretched, but investors should note share price appreciation is likely to be driven by the timing of and announcements related to the upcoming iPhone8 introduction.
– FB results will be out Wed 5/3 and the company is expected to deliver sector-leading sales and EPS growth, reflecting its rising importance to online advertising. However, management needs to offer clear commitment to addressing in a substantial, committed manner the company’s role in distributing “fake news”, an area of significant concern around the recent U.S. and upcoming E.U. elections. FB share valuation relative to its underlying growth prospects is the most reasonable amongst the peer group at a 0.88 P/E/G ratio.
Large-Cap U.S. Tech Stocks