The stock market’s strong rally from the March lows has indisputably been driven by Big Tech. But how much higher can we go, particularly amid the pandemic?
We are certain to get answers to this question (and others) this week as the third quarter earnings season kicks into high gear with results expected from technology heavyweights Amazon (AMZN) and Netflix (NFLX) — two FAANG components that have seen their stock prices rise within striking distance of all-time high levels. We will also get results from Microsoft (MSFT), Intel (INTC) and Tesla (TSLA) – each of which have something to prove. Among the three, Tesla will likely be the biggest story.
The electric vehicle maker has promised to deliver 500,000 vehicles for the current fiscal year and analysts (and the bears) will be eager to see if Tesla, which has future plans of producing a fully autonomous electric car for $25,000, will double down on those projections. It will certainly be a drama-filled week that delivers many answers. On the investment front, we will know whether the recent rotation out of “growth” and into “value” has lasting power.
On average, analysts forecast Q3 earnings to rise 5% sequentially. And over the past three earnings earnings revisions have trended higher, rising by about 4.5%. You would have to go all the way back to the first quarter of 2018 to find the last time upward earnings revisions were this high. While that’s an encouraging figure, it has to be noted that it would still mark a 20% earnings decline year over year. Beyond the tech sector, analysts are encouraged by the recent strength in sectors such the consumer discretionary and cyclical sectors like industrials.
Friday’s strong consumer sentiment data, combined with more optimism about additional fiscal stimulus, creates the perfect setup for a market rally this week. Conversely, the market is known to punish companies for falling short of expectations and issuing weak guidance. Here are this week’s earnings names to keep an eye on:
Netflix (NFLX) – Reports after the close, Tuesday, Oct. 20
Wall Street expects Netflix to earn $2.13 per share on revenue of $6.38 billion. This compares to the year-ago quarter when earnings were $1.47 per share on $5.24 billion in revenue.
What to watch: Despite year-to-date gains of 67%, it still seems as if Netflix has moved under the radar so far in 2020. While the company didn’t excite investors with its second quarter miss on customer subscription totals, the 10 million it did deliver was 3 million more than its own guidance. What’s more, Q2 revenue rose 25% year over year to $6.15 billion, topping consensus estimates of $6.08 billion. In other words, there is still a lot to like with this story. The stock has risen about 9% over the past month as Covid cases continue to rise, suggesting more shelter-in-place restrictions could be underway. The streaming giant guided for only 2.5 million new subscribers in the just-ended quarter, which is 50% below consensus estimates. This tells me that Netflix put itself in a position for a strong beat on Tuesday.
Microsoft (MSFT) – Reports after the close, Wednesday, Oct. 21
Wall Street expects Microsoft to earn $1.54 per share on revenue of $35.72 billion. This compares to the year-ago quarter when earning were $1.38 per share on $33.05 billion in revenue.
What to watch: Work and learn-from-home trends continue to power increased demands for Microsoft services, evidenced by the strong Q4 demands in its Productivity and Business and Intelligent Cloud segments. But the strength of Microsoft’s Commercial Cloud business has been, and will continue to be, the catalyst for the stock’s strong year-to-date return of 40%. Last quarter Azure revenue was up 50% year over year — a slight deceleration from the 61% growth in Q3. Wall Street remains broadly positive about the company’s prospects to achieve double-digit revenue growth in fiscal 2021, driven by Azure’s momentum. On Wednesday investors will want some evidence that Azure and Microsoft’s Teams (a Zoom (ZM) competitor) can continue to propel the company higher.
Tesla (TSLA) – Reports after the close, Wednesday, Oct. 21
Wall Street expects Tesla to earn 56 cents per share on revenue of $8.26 billion. This compares to the year-ago quarter when earnings came to 37 cents per share on revenue of $6.3 billion.
What to watch: With year-to-date gains of 430%, shares of Tesla have run over every bear standing in its way. While skeptics continue to scoff at the stock’s high valuation compared to the rest of the auto industry, the bears insist on relegating the company to just an auto-manufacturer. But when assessing the company’s growth trajectory and its diverse product portfolio, which — aside from electric vehicles — includes batteries, software, solar roof/panels, Tesla is more than a one-trick pony. It is a sustainable energy company. The question is, can the stock continue to drive higher Wednesday? That all depends on whether the company can deliver a GAAP profit for Q2 which would mark not only its fifth straight profitable quarter. In Q2 Tesla’s automotive margins fell to 18.7% in amid plant shutdowns.
Amazon (AMZN) – Reports after the close, Thursday, Oct. 22
Wall Street expects Amazon to earn $7.25 per share on revenue of $92.48 billion. This compares to the year-ago quarter when earnings came to $4.23 per share on revenue of $69.98 billion.
What to watch: Shares of Amazon have moved 5% higher this week as investors anticipate not only strong numbers from Prime Day, but also better-than-expected results for the Q3. The e-commerce giant is executing at near perfection evidenced by the 40% rise in total net revenue in the second quarter. The company is benefiting from a combination of factors. Aside from the strong demand acceleration caused by the pandemic, Amazon continues to be effective in its strategy not only to grow its Prime members, but also getting them to spend more during each transaction. And there is tons of evidence to suggests that its market share gains are here to stay, beyond the pandemic. As such, while some investors might be concerned about near-term margin pressure, it would be a mistake to part with this long-term winner.
Intel (INTC) – Reports after the close, Thursday, Oct. 22
Wall Street expects Intel to earn $1.11 per share on revenue of $18.22 billion. This compares to the year-ago quarter when earnings were $1.42 per share on revenue of $19.19 billion.
What to watch: What can Intel do to redeem itself? Its shares were clobbered by 12% following its second quarter announcement, during which the company said it would delay its 7nm-based chip by 18 months to two years. This seemingly gave Intel’s rivals, namely Advanced Micro Devices (AMD), a strong lead which would be hard for Intel to regain. The news overshadowed what was otherwise a great quarter as Data Center Group revenue soared 43%, driven by 47% increase in cloud service provider revenue. With the stock still down 10% year to date, Intel looks like a bargain. But the company on Thursday must show better execution and market share gains from improving demand in personal computer sales due to the work-from-home environment.
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