Stocks have been under consistent pressure in the first four months of the year, driven by several headwinds. Aside from rising inflation, which is at a 40-year high, there are also rising interest rates, supply chain challenges and uncertainty with the overall health of the economy. And it certainly hasn’t helped that the war between Russia and Ukraine adds additional uncertainty about the long-term global growth impact.
Has all of the bad news been priced into the market? When will stocks finally reach bottom? These are the key questions investors are asking. Evidenced by Friday’s continued punishment in stocks, investors are seemingly less confident that the upcoming earnings results from the most-influential companies in the S&P 500 will be impressive enough to reverse the slide, particularly in tech stocks.
The Dow Jones Industrial Average was punished Friday, falling 979.32 points, or 2.81%, to end Friday’s session at 33,813.44. Among the Dow’s notable decliners were Apple (AAPL), Salesforce (CRM), Microsoft (MSFT) and Walt Disney (DIS). The S&P 500 lost 121.76 points, or 2.77%, finishing at 4,271.90, while the tech-heavy Nasdaq Composite dropped 335.36 points, or 2.55%, to close at 12,839.29. The Nasdaq was pressured by another decline in shares of Netflix (NFLX), which has given up almost 40% in three days.
The streaming giant spooked the market earlier this week when the company said it lost 200,000 subscribers on a net basis last quarter, when it had expected to add 2.5 million subscribers. It was its first subscriber loss in a decade, and things won’t get better any time soon. The company forecast to lose another 2 million net subscribers for the second quarter. This guidance is in stark contrast to Wall Street estimates that called for Netflix to increase Q2 subscribers by around 2.4 million. The market didn’t take this new too kindly, swiftly wiping out more than $50 billion off the company’s market capitalization.
Netflix stock hit a 52-week high of $700.99 on Nov. 17, and now trades at around $215, meaning it has lost 70% from its high. With the stock down so much in just three days, the market is wondering is this a sign of things to come from other tech companies during this earnings season? The Nasdaq Composite is not only in correction territory (measured as at least a 10% decline from its recent record close), it is also firmly in bear market territory, which is at least a 20% decline from its recent record close.
The main question heading into the week is whether this punishment will continue, particularly as Big Tech comes into focus with Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) slated to announce their results. The guidance they provide for the current quarter and beyond will reveal their level of confidence in navigating supply chain headwinds. Understandably, given the many areas of uncertainty, stocks are responding cautiously. Here are the names to keep an eye on for this week:
Alphabet (GOOG , GOOGL) – Reports after the close, Tuesday, Apr. 26
Wall Street expects Alphabet to earn $27.40 per share on revenue of $72.09 billion. This compares to the year-ago quarter when earnings came to $22.30 per share on revenue of $56.90 billion.
What to watch: Online advertising has seen a drastic slowdown amid various macroeconomic concerns such as rising inflation. According to analyst Rohit Kulkarni at MKM Partners, there’s an expected slowdown in ad spending, particularly in the first half of the year. Kulkarni expects the decline in U.S. spending could lead to growth of only 9% to 11% due to tough year-over-year comparisons. As such, he’s trimming his Q1 estimates for Google which relies on advertising for a great portion of their revenues.
He wrote: “We believe online advt. companies are facing four incremental macro headwinds: (1) direct impact of the Russia/Ukraine war; (2) indirect impact and potential contagion from the war into Europe; (3) soft brand ad spend, particularly around geopolitical content; and (4) likely impact from soft consumer spend in Europe, driven by inflation and higher oil prices.” That said, when factoring the recent momentum of Google Cloud Platform and Google Workspace, the company has shown considerably more growth than it has received credit for. Estimate calls for Google Cloud to deliver Q1 segment revenues of $5.8 billion, implying year-over-year growth of 47%. Can Google’s cloud business be an offsetting factor for the slowing ad business and make up the difference?
Microsoft (MSFT) – Reports after the close, Tuesday, Apr. 26
Wall Street expects Microsoft to earn $2.18 per share on revenue of $49.03 billion. This compares to the year-ago quarter when earning were $1.95 per share on $41.71 billion in revenue.
What to watch: Without question, tech stocks such as Microsoft have been one of the worst-performing groups on a year-to-date basis. Supply chain issues and rising inflation has been part of the reason that many once high-flyers continue to vastly underperforming the overall market. Despite beating earnings estimates in the past six quarters, Microsoft stock has lagged its tech peer group such as the FAANGs. The stock is down some 18% year to date, trailing the 8% slide in the S&P 500 index. Investors want to know what it will take for it to rebound. The company’s cloud revenue (Azure) continues to be a key growth driver for Microsoft, which rose 32% last quarter to reach $22 billion. Just as impressive, gross margin for its cloud services increased 21% last quarter to $2.3 billion, thanks to growth in Azure and other cloud services. The company’s gaming revenue will also be closely-watched. Fresh from its $69 billion all-cash deal for video game giant Activision Blizzard (ATVI), Microsoft is making a play for the Metaverse. Wall Street has broadly applauded the deal, which many expects to receive little regulatory challenges. Overall, Microsoft is poised to benefit from these well-established trends in both segments. The question is, will the stock respond?
Meta Platforms (FB) – Reports after the close, Wednesday, Apr. 27
Wall Street expects Meta to earn $2.56 per share on revenue of $28.23 billion. This compares to the year-ago quarter when earnings came to $3.30 per share on revenue of $23.67 billion.
What to watch: Amid the recent tech selloff, Meta shares have been punished, falling 38% and 45% in the respective three months and six months. The decline includes 10% drop this past week alone. And when factoring the sort of aggressive selling that we have witnessed, FB stock as lost more than 50% since reaching its 52-week high of $384. Slowing users and ad growth at its core Facebook and Instagram products have spooked the market into questioning Meta’s future. Citing weakness for e-commerce efforts, overall traffic, and advertising spend, earlier this week analysts at Cleveland Research slashed their estimates for the just-ended quarter well below Street consensus. The analysts also referenced market share losses to rivals. But CEO Mark Zuckerberg is betting heavily on the Metaverse which, according to some estimates, is expected to grow as much as $2 trillion annually. The company’s advances in virtual reality with its Oculus VR headset (Meta Quest) gives it a leg up on the competition. Until ten, Meta’s Reality Labs, which included augmented reality/virtual reality hardware as well as software and content, will need to show it can become the profit center the company is betting on it to be.
Apple (AAPL) – Reports after the close, Thursday, Apr. 28
Wall Street expects Apple to earn $1.43 per share on revenue of $94.02 billion. This compares to the year-ago quarter when earnings came to $1.40 per share on revenue of $89.58 billion.
What to watch: Investors want to know whether it’s still worth it to bite into Apple: Supply chain disruptions and rising inflation have served as headwinds for the iPhone maker. In a research note to investors last week, analyst Brian White of Moness Crespi said, “troubling inflationary forces and the economic impact from the conflict in Ukraine” will result in consumers being more selective in their purchases. Although he reiterated a Buy rating on the stock with a $199 price target, White was cautious, citing declining work-from-home trends, which was once the main driver of the increased demand for laptops, tablets and the accessories that Apple sells, noting that “the extent of the unwind is unclear.” Meanwhile, Morgan Stanley analyst Katy Huberty, who has an Overweight rating on Apple with a $210 price target, was more optimistic. ”We expect Apple to post upside to March quarter consensus revenue estimates on the back of iPhone 13 and Mac strength, which we believe more than offset relative weakness in iPad and the App Store in the quarter.” While Apple stock has held relatively well during the selloff (up 11% in six months), the shares have fallen 10% from their 52-week high and are down 6% year to date. Investors are hoping for more clarity and conviction on the bullish thesis on Thursday.
Amazon (AMZN) – Reports after the close, Thursday, Apr. 28
Wall Street expects Amazon to earn $8.13 per share on revenue of $116.29 billion. This compares to the year-ago quarter when earnings came to $15.79 per share on revenue of $104.46 billion.
What to watch: What’s wrong with Amazon? That has been the main question over the past several months as the stock has gotten punished, falling some 15% in six months, compared to the 3% decline for the S&P 500 index. Shares of the e-commerce giant are already down more than 11% year to date, including 8% just in the past thirty days alone. The market is re-assessing tech valuations and Amazon has seemingly gotten caught in the middle. The company has also suffered slowing revenue growth. But with the stock now trading more than 20% below its 52-week high of $3773, it’s hard to ignore Amazon’s value, according to Citigroup analyst Ronald Josey, who has a Buy rating on the stock with a $4,100 price target. Adding the stock to its focus list, Josey believes “Amazon should benefit from improved operational efficiencies at its new Fulfillment Centers, the closing of some of its physical retail locations, and the lapping of COVID-related labor shortages.” In addition to the AWS and Amazon Advertising which he sees as being in strong growth phases, the analyst expects Amazon’s margins to continue to expand over the next few years commensurate with revenue growth. The question is whether these trends can show enough early strength to revive the stock.
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