Earnings season is underway at this time, and the few stocks that have announced have produced some mixed results so far. One industry that is expected to see earnings decline in the second quarter is the tech sector, and we have seen mixed results from International Business Machines (NYSE: IBM) and Netflix (Nasdaq: NFLX).
IBM saw earnings grow, but revenue declined from the previous year. The company did beat estimates on both the top and bottom lines. This was good enough for investors, and the stock moved higher early Thursday morning.
Netflix was more mixed with a beat on the EPS side of the equation and a miss on the revenue side. The big news on Netflix was that the company saw a decline in U.S. subscribers, and they fell short of the global subscriber estimate. This led to the stock falling over 11% on Thursday.
Sure these are only two stocks and some would even argue whether Netflix should be considered a tech stock and is really a communication services stock. I’m not here to argue semantics, but rather I want to urge investors to be cautious. I wrote an article last week that talked about the fact that earnings were expected to decline in the second quarter. I specifically pointed out that the average tech stock was expected to see earnings decline by 10%, and that I wasn’t sure whether investors were ready for the reports.
Microsoft is expected to report after the closing bell on Thursday, and those results will likely hit before this article is published, so I wanted to look at some of the tech stocks that are expected to report next week.
Once again, I included some stocks that are considered communication services stocks, but can also be considered under the tech umbrella. Looking at the table below we see chip manufacturers Texas Instruments and Intel, Amazon, Alphabet (Google), PayPal, and Twitter.
Looking at the last two columns, we see that every company except Alphabet is expected to see at least a year over year decline or a quarter over quarter decline. Texas Instruments is expected to see declines in both of these respects.
Another suggestion I made to readers in last week’s article was to look at the sentiment of the individual companies.
“My suggestion to Bull Market Rodeo readers is you need to look at the sentiment readings on individual stocks that you own to see if the sentiment is extremely bullish or not. If analysts’ ratings are almost all “buy” ratings, if the short interest ratio is below 2.0, if the put/call ratio is below 0.75—these are all signs that sentiment is too bullish. When this happens, it becomes very difficult for the company to clear the expectations hurdle.”
To help with the sentiment for the tech stocks mentioned above, I put together the following table. For the analysts’ ratings they are expressed as buys/holds/sells. SIR stands for short interest ratio, and PCR stands for put/call ratio. I color coded the table with red representing areas of extreme optimism, orange representing areas that are slightly optimistic, and green representing areas displaying pessimism.
We see that Texas Instruments and Intel don’t have any areas marked as optimistic. Alphabet doesn’t have any areas marked as pessimistic. All the others are mixed.
This is similar to the process I go through to select stocks for my portfolio, but you can’t use sentiment as a standalone tool. It should be combined with fundamental and technical analysis to form a complete picture. Just looking at the sentiment and the earnings expectations, the semiconductor stocks seem to have relatively low expectations at this time. Alphabet seems to have the highest expectations, and I think investors should be concerned there.