Earnings* from some of the biggest US ‘tech’ companies are on tap this week, though for each of them, numbers on everything from user growth, paid clicks and subscriptions could turn out to be just as important.
Wall Street whispers on Apple after Samsung woes
Apple shares have recouped fairly steadily since finding a floor in July some 30% lower than April 2015 all-time highs. The likeliest reason for this is the gradual rebasing of investor expectations as the market reconciles itself to the group selling ‘just’ 40-50 million iPhones a quarter after sales of its flagship product failed to grow for the first time ever in the quarter ending in March.
Another fall came in the third quarter though record growth in Apple’s booming services businesses—including everything from iTunes, streaming, Apple Pay and, of course, apps—took the edge off the hit to revenues and profits, particularly as the group is perceived to be barely pushing the envelope on selling digital products.
Come the final quarter for Cupertino’s most famous resident, one in which it released its latest iPhone variants, sentiment has firmed around a baseline of iPhone sales growth forecasts and likely continued software and services expansion.
But could these more realistic expectations actually be beaten on the upside?
A growing cadre on Wall St. is now actively expecting Apple to trounce the average forecast of 45 million iPhone sales when it releases fourth-quarter results on Tuesday, 25th October after the US market’s close. The idea is that Samsung’s Galaxy Note 7 debacle and the timely release of the iPhone 7 near the ‘holiday’ season might have combined to turbo charge Apple’s biggest retail product, particularly given that Apple has held on to the best customer loyalty ratings among rivals, despite the iPhone dip.
On that basis, iPhone sales closer to 70 million or higher are being increasingly bandied about for the quarter that will end in December Q1, albeit manufacturing kinks have been fairly common following new Apple launches, and could certainly throw a spanner in the sales works.
Other watch points include M&A, something that Apple has historically engaged in only sparingly, but might dip its toe into more decisively soon, given the $231.5bn in cash on its balance sheet at the end of the third quarter and its need to establish new sources of revenue growth. Having reportedly approached Time Warner Inc. well ahead of AT&T’s proposed mega merger, the conference call between analysts and top Apple management following Tuesday’s earnings release could be enlivened by probing questions.
Additionally, the group has another important event this week on 27th October at which it’s expected to unveil the first new Macs for years and, judging from past behaviour, a few surprises too. Investors will listen for any clues on Tuesday night.
More importantly, forecasts of the group’s all-important ‘holiday’ quarter ending in December (actually its first quarter in 2017) currently foresee total sales shrinking 1% to around $75bn and EPS at $3.20. The latter would already be 2.6% lower than the year before. Any further ‘downgrade’ in guidance relative to expectations would probably stop the AAPL bounce in its tracks.
Here are the main forecasts for Apple’s fourth quarter with the change from the same quarter a year ago:
- Revenues: $46.902bn, down 8.9%
- Net income: $8.915bn, down 20%
- Earnings per share: $1.65, down 16%
Facebook sales jump to eclipse any user growth wobble
Daily active user growth rates have actually been volatile at the world’s biggest social network. The total of 1.09 billion for the three months that ended in March was 16% higher year on year, but represented the first significant growth for several quarters, and the group only managed to match that growth in the quarter that followed.
That said, the group will continue to enjoy a tailwind with investors so long as third quarter quarter revenue growth—to be reported on Wednesday 2nd November—does not dip below 50% year-to-year, something that has not occurred since the third quarter of 2015.
The group’s shares will also continue to be bolstered by the monetisation opportunities at Instagram, WhatsApp and Messenger—AKA, a significant ramp in external advertising on those platforms, which has not occurred yet. There is only so long shareholders will tolerate remaining in suspense, though a 27% stock price rise this year speaks of further stores of patience yet. More so whilst live video is still largely a nascent source of revenue at the world’s third most visited web destination, according to Internet ranking firm Alexa.
Few Wall St. brokerages expect Facebook’s total digital advertising market share to be below 25% in five years from now, compared to less than 20% at the beginning of 2016.
Here are the main forecasts for Facebook’s third quarter with the change from the same quarter a year ago:
- Revenues: $6.2bn, up 53.7%
- Net income: $2.77bn, up 40%
- Earnings per Share: $0.97, up 69%
Amazon.com investors primed for more streaming growth
The fastest-growing cloud computing group in the world is also among the biggest investors in streaming media, which helps explain why the strength of its almost 75% rally since February may depend as much on the amount of new video viewers the group has tempted to sign-up as on how many more brown cardboard boxes it’s delivered.
With Prime membership the key to the best delivery rates from the e-commerce giant and with exclusive streaming media included in the price, Prime subscriptions are keenly eyed, and will need to exceed the 50% jump seen last year, to keep investors tuned. That suggests anything less than a double-digit percentage increase each quarter, including the third, which Amazon.com will report after US-market close on 27th October, will get a negative shareholder reaction.
The main forecasts for Amazon’s third quarter with the change from the same quarter a year ago:
- Revenues: $32.6bn, up 28.9%
- Net income: $386.05m, up from $79m in Q3 2015
- Earnings per share: $0.80 up from $0.17 in Q3 2015
Twitter revenue optimism is high
Twitter will announce earnings on Thursday 27th October after the market close for Q3. Expectations are fairly high for the beleaguered micro blogging site. Revenues are expected at the higher end of Twitter’s Q3 guidance at around $605m, guidance was for $590m – $610m. This compares with $602m in Q2. Arguably the most important metric for investors will be Monthly Active Users (MAU), which is becoming Twitter’s most watched metric.
MAU growth has proven tricky in recent quarters as new users of Twitter have proven elusive. There was some good news in Q2, with subscribers growing to 313 million from 310 million in Q1. Without significant MAU growth then it is hard to see how the share price can rally, as MAU is the lifeblood of a company like Twitter. The share price is currently down nearly 27% year-to-date, as rumours of a buyout have come and gone. Salesforce had a genuine interest in buying Twitter early in October, however, one reason why it walked away was the amount of abuse that is on the micro blogging site. Management will have to address these recent buyout rumours, which have not materialised. We expect them to distance themselves from any plans to put the company up for sale, and instead focus on how the company plans to deliver future MAU growth.
Thus, the three key things to watch from this earnings announcement is revenue growth, MAU users, and forward guidance especially around buyout rumours. Twitter has an uphill battle to turn its fortunes around. Although it has decent cash flow, and a falling cost base (liabilities did rise a touch in Q2 to $449m from $422m, but this is significantly lower than the $506m in Q4 2015), without significant MAU growth it is hard to see how Twitter’s share price can stage a sustained recovery back towards the $22 high from the start of the year.
Google ad growth may distract from Alphabet spending
Of all the ‘Big Internet’ outfits deemed to enjoy quasi-monopolies, the search giant Google is preeminent. Hence, the quarter in which revenues at its parent, Alphabet, did not at least inch ahead—using its own adjustments—was some time ago. Alphabet has in fact now notched a handful of quarters of very respectful sales and EPS rises, including a 21% jump in Q2 to $21.5bn and a more than $2-a-share earnings jump to $7.
The longer-term worry for its investors is the price Alphabet has been willing to pay for sales growth that continues to pale against expansion at its cross-Valley rival Facebook, where revenue growth has recently been more than double that of the search giant. That spending is now, of course, shouldered almost entirely by Google’s parent Alphabet, where operating losses on these bets expanded by almost $200m in Q2 compared to last year, to $859m.
Alphabet’s stock has risen at a mildly faster 7% clip year-to-date compared to a total aggregate return of 6.6% for the S&P 500. Investors can be expected to grow even more cautious if Alphabet spending brings losses to a level commensurate with those in the second-quarter.
Still, the first figures investors will eye when the group reports earnings on the night of Thursday 27th October will be digital advertising metrics at Google, particularly pay-per-click. Growth will need to match the 29% seen in Q2 to warrant continued advances of Alphabet shares into the year end, though a figure above 30% will do much to alleviate another surge in spending.
The main forecasts for Alphabet’s third quarter with the change from the same quarter a year ago, are as follow:
- Revenues: $22.05bn, up 18%
- Net income: $6bn, up c. 18%
- Earnings per share: $8.63, up 17.4%
*All forecasts use the non-GAAP basis as it is the one most followed by investors.