by Clement Thibault
Just three weeks ago, the final earnings season of calendar 2017 kicked off (Q4 reports will be released in early 2018). JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and financial sector peers opened the proceedings which started on Thursday October 12.
Since then we've had a few negative shockers—Netflix (NASDAQ:NFLX) and Philip Morris International (NYSE:PM) come to mind—but positive surprises, including IBM (NYSE:IBM) and Twitter (NYSE:TWTR), were far more common.
Overall, corporate profits and revenue are on the rise, and the negative surprises were few and far between. Strong earnings have propelled all major US indices including the S&P 500, Dow and NASDAQ to new all-time highs and we're only halfway through the season. If Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) live up to expectations on Wednesday and Thursday respectively, there's little doubt we'll be seeing new records this coming Friday as well.
Before the second half of earnings season begins, here's our take on what's already occurred and what investors might expect going forward:
After a stellar first half of the year in which shares of some of the tech giants such as Facebook and Amazon (NASDAQ:AMZN) gained as much as 30% in value, the mega-cap dominated sector seemed to have slowed, allowing the market to catch up. But that was short-lived. As more reports are released, this earnings season is turning into a massive adrenaline shot for shares of the marquee tech companies.
Last Thursday, which many dubbed Earnings Super Thursday, turned out to be the biggest highlight of the season so far, as Amazon, Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and even Twitter reported better than expected results. The NASDAQ took notice, climbing 2.2% on the day Friday, the index's biggest one day gain of the year so far.
To no one's surprise, shares of all five companies surged in the following trading session. Alphabet rose 4.2%, Microsoft jumped 6.4%, Intel popped higher 7.3%, and besting them all, Amazon shares were boosted by a staggering 13.2% following the news. Over the course of two trading sessions, Twitter rose as much as 26%, from $17.1 to $21.6.
What to make of it all?
Alphabet, Intel, and Microsoft each continued their strong growth and earnings trends. We expected Alphabet and Intel's robust results and the subsequent stock price boost. Microsoft surprised with the stronger reaction to earnings than we anticipated.
Amazon and Twitter are a bit different. The Twitter price surge after its report is still largely predicated on hopes that the social media company's growth will continue. A trend has not yet been established though; Twitter has had isolated good reports in the past. We view the stock price increase as premature.
Amazon on the other hand is a crowd favorite. After last quarter's disappointing performance, it's possible investors overreacted to this quarter's success. Amazon Web Services, the company's cloud computing segment, may have done did very well, but the company isn't any closer yet to cashing in on its much bigger retail operation.
Other tech stocks that have already reported include Netflix (NASDAQ:NFLX), IBM and Advanced Micro Devices (NASDAQ:AMD). Netflix reported on Monday October 16, and missed EPS estimates, coming in at $0.29 versus an expected $0.33. Netflix's subscription based business model makes its revenue very predictable, so no surprises there. The stock did not have a strong reaction even though Netflix added more subscribers than expected, showing that Wall Street has begun to care about the company's bottom line.
On Tuesday October 17, IBM slightly beat on EPS and revenue, with an EPS of $3.3 against an expected $3.28, and $19.1 billion in revenue against the $18.6 billion forecast. IBM shares shot up 11%, from $146 to $162, over the next trading sessions on the positive results. However, this was still the 22nd consecutive quarter of declining growth for IBM. Once the euphoria settled, the stock stabilized around $153.
AMD released good results as well last Tuesday, October 24. It reported $1.64 billion in revenue and an EPS of $0.1, against $1.51 billion and $0.08 EPS forecast. However, the company said it expected revenue to fall next quarter, by as much as 18% on flattening demand. The bad news outweighed the positive earnings, and the stock spiraled lower, from $14.2 to $11.4, an almost 20% loss.
Among the non-tech stocks, the financial sector had a strong quarter, with the four major U.S banks—JP Morgan, Wells Fargo, Bank of America (NYSE:BAC) and Citigroup (NYSE:C)—beating estimates on both revenue and EPS.
However, a fall-off in Wells Fargo's net interest margin caused the stock to slide 2.7%, which dragged the entire sector down. Still, after the initial market reaction, financials settled higher—in part because of renewed chatter regarding the possibility of tax cuts.
Since it reported, JP Morgan is up 5%, now trading at $101. Bank of America is up almost 10%, after jumping from $25.4 to $27.8. Wells Fargo regained previous losses, and is now trading at 55.8, 60 cents (1.1%) higher than before the earnings report. The laggard of the four, Citigroup, is down 2.5% since its earnings report, after falling from $75.8 to $73.8.
There are still a few more marquee reports coming up as we enter the second half of the season.
Facebook is expected to report $9.84 billion in revenue and an EPS of $1.28. Tesla is expected to report $2.93 billion in revenue and negative earnings per share of $2.27. Wall Street expects Qualcomm to deliver $5.8 billion in revenue and an EPS of $0.81.
Thursday November 2 will be Apple's (NASDAQ:AAPL) day in the sun. The tech giant is facing negativity amid slower than expected iPhone 8 sales as well as iPhone X delays. It is expected to report $50.79 billion in revenue and $1.87 of earnings per share.
Although it hasn't been officially confirmed yet, Warren Buffett's Berkshire Hathaway (NYSE:BRKa) is anticipated to report quarterly earnings this Friday. The conglomerate, led by the Oracle of Omaha, is forecast to report $59.79 billion in revenue, as well as an EPS of $2402.
Next Thursday, November 9, Disney (NYSE:DIS) and Nvidia (NASDAQ:NVDA) report. Wall Street expects $13.29 billion in revenue and $1.14 EPS from Disney; $1.69 billion in revenue and 0.94 EPS from Nvidia.
Rounding out as well as unofficially closing the season will be the retailers.
On Tuesday, November 14, Home Depot (NYSE:HD) reports. The home improvement giant is expected to report EPS of $1.81 on $23.04 of revenue.
Walmart (NYSE:WMT) reports the following Thursday, November 16. Wall Street is expecting $118.7 billion in revenue, on $0.97 of earnings per share.
This week's Facebook and Apple reports are critical for the market's bullish mood to continue. Better than expected results from each will help propel the S&P and the Dow to new records as they head toward 2600 and 24,000 respectively.
Nvidia investors have high hopes for the company. A disappointing quarter or lowered corporate guidance could send shares tumbling 10% or more.
As for retailers, investors have grown inured to lowered expectations for the sector. They aren't anticipating big surprises. The fact that Amazon reported stronger revenue than forecast will probably have come at the expense of bricks-and-mortar peers, as has been the case over the past few years.
With that, on to the second half!
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