Article / 22 January 2014 at 10:38 GMT

US Earnings Preview: The five giant technology disrupters

Head of Equity Strategy / Saxo Bank

By Peter Garnry

The US 4Q earnings season is hitting full speed this week and next. Most notable on the agenda are the five biggest technology disrupters of recent years — Apple, Facebook, Google, Netflix and Amazon. Investors are fascinated by technology stocks and the sectors's outperformance of the general stock market was one of the major trends in 2013 and it has continued this year. The NASDAQ Composite Index closed at 4,225.76 yesterday coming closer to the all-time-high at 5,048.62 set on March 10, 2000.


Tech 5
The tech disrupters — Apple, Netflix, Facebook, Google and Amazon. Images: Shutterstock


Apple (AAPL:xnas) — Christmas, pipeline and China

  • Reports FY14 1Q earnings on Monday after market close. Consensus EPS estimate is 14.04 compared to 13.81 last year. The previous four earnings releases Apple has beat expectations but investors have not been satisfied due to a disappointing outlook for new products.
  • Apple's 1Q result is always the most important as the quarter includes its Christmas sales and represent a third of the company's annual profit. Any news or hints about the pipeline will be in focus as the CEO, Tim Cook, has said that "2014 will be a very interesting year". Product rumours are centered around iWatch, iPhone 6, iPad Pro, and iTV.
  • The recent deal with China Mobile is a huge thing for Apple which finally gets its distribution channel in place for the Chinese market. The deal represent upside potential to management's outlook for 2014.
  • Our quant model is positive on Apple, indicating that the stock is undervalued and is enjoying momentum with the stock price up 25 percent the last six months.

Share price since 2006

Apple share price
Source: Saxo Bank

Facebook (FB:xnas) — ads and teen engagement

  • Reports FY13 4Q earnings on Wednesday next week after the market close. Consensus EPS estimate is looking for 0.27 compared to 0.17 last year. In the last two earnings releases, Facebook's EPS has surprised to the upside by 35 percent and 39 percent respectively, propelling the stock price up by 111 percent in the last six months.
  • Demand for ads on Facebook is still growing healthily due to Facebook's high 16 percent market share of overall Internet time and 20 percent of mobile. Continuing high growth rates for demand and updates on auto-play video ads are crucial in the upcoming earnings release. Another major issue concerning Facebook is data showing that 13-15 years old teens are spending less time on Facebook. It is still too early to say whether they are just leaving for Facebook-owned Instagram or worse — migrating to Snapchat.
  • Our quant model indicates that the stock is fundamentally overvalued but impressive momentum is offsetting the fundamentals for now. The model has a neutral view on Facebook. 

Share price since IPO

Facebook share price
Source: Saxo Bank

Google (GOOG:xnas) - full speed on Mobile and YouTube

  • Reports FY13 4Q earnings on Thursday, January 30, after market close. Consensus EPS estimate is 12.32 compared to actual EPS of 10.65 a year ago.
  • Expectations for revenue growth are high with Wall Street looking for an annual growth rate of around 16 percent in the coming years. The main drivers will be Mobile, with sales coming from apps and ads, and YouTube with its news ad platform. YouTube is a very exciting category that is finally kicking into a higher gear for Google with revenue projected to hit USD five billion in 2014. Research shows that more young consumers spend more time on YouTube than on cable networks. A positive outlook for Mobile and YouTube is crucial for positive share performance over the earnings release.
  • Our quant model has just downgraded Google to neutral from positive following the more than 20 percent rally in the last six months. On fundamentals,the stock is overvalued.

Share price since 2006

Google share price since 2006
Source: Saxo Bank 

Netflix (NFLX:xnas) — the race for total domination

  • Reports FY13 4Q earnings today after the market close. Consensus EPS estimate is 0.66 compared to actual EPS of 0.13 a year ago. Netflix has a long history of positive earnings surprises but with very volatile price impact around the release. Investors are much more focused on the outlook than the actual EPS number because the majority of the current valuation is based on high expectations for where Netflix will be in five years.
  • Netflix is expected to reach around 33 million US streaming subscribers, reflecting strong growth. The company continues to disrupt the TV market and with it latest own content production such as House of Cards and Orange is the New Black it has shown that there might be a way forward to free themselves somewhat of the cost pressure of third-party content providers. This remains the biggest challenge for Netflix with the cost input somewhat out of its hands.
  • A major issue that will be the focus of the management's conference call is the recent net-neutrality ruling which means that in future, broadband providers may charge extra fees for Netflix's huge load on the broadband networks. The current net-neutrality prohibits broadband providers from slowing or blocking selected Internet traffic. It is worth remembering that Netflix is about 30 percent of peak evening US Internet traffic.
  • Our quant model has a negative view on Netflix driven by fundamentals not supporting the current valuation premium and the latest negative price action due to the recent net-neutrality ruling.

Share price since 2006

Netflix share price
Source: Saxo Bank 

Amazon (AMZN:xnas) — forget about profits

  • Reports FY13 4Q earnings on Thursday, January 30, after market close. Consensus EPS estimate is 0.67 compared to actual EPS of 0.21 a year ago. Amazon has a tradition for reporting earnings that are substantially off EPS estimates (both to the plus and minus side) but investors have historically been positive and pushed up the share price.
  • 3Q growth was very strong both in the top line and gross profits. Operating margins are still under pressure but this is mostly related to strategies chosen by Amazon's management. The company's founder, Jeff Bezos, has repeatedly said that investors should understand that Amazon is not here to maximise profits in the short term. The 4Q result is key for Amazon as it includes the Christmas season and therefore this earnings release will be judged on one thing alone and that is revenue growth. That is all that matters for Amazon.
  • Our quant model is neutral on Amazon driven by fundamentals not supporting the current valuation premium.

Share price since 2006

Amazon share price
Source: Saxo Bank 




Peter Garnry Peter Garnry
Great update on the latest rumours about what the iWatch will do if it is launched this year.


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