Tech’s Problems Multiply: Earnings This Week

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Technology stocks rebounded sharply yesterday, but recent earnings reports show problems multiplying in the sector.

Just look at Amazon.com (AMZN), Alphabet (GOOGL) and Facebook (FB). All three missed revenue estimates, potentially marking an end to years of solid growth. Sellers hammered AMZN and GOOGL on the news, but FB staged a relief rally — likely because it was already down so much before the report.

A deeper look at the numbers shows potential reasons to be less bullish. AMZN, for example, had weak e-commerce sales (its core business) and a poor outlook for the holidays. GOOGL’s new initiatives like YouTube and Cloud failed to bring home the bacon, even after absorbing billions of dollars in investment.

FB’s in a similar boat as CEO Mark Zuckerberg strives to reap moolah from services like Messenger. Meanwhile, usage fell in Europe and continued to stagnate in North America.

Did you miss last week’s earnings recap? Click here for access.

Another narrative may emerge going forward: AMZN more than doubled its advertising revenue last quarter. Yep, the e-commerce giant is now looking to profit from sheer traffic on its site. Jeff Bezos has already upended industries like retail and health care. How long before he inflicts pain on the core businesses of GOOGL and FB?

Amazon.com (AMZN) chart showing historic daily changes.

Shifting to hardware, disk-drive and storage company Western Digital (WDC) had its biggest drop in at least a decade after whiffing on profit, striking out on revenue and coming up goose eggs on pricing. Analysts blame cooler enterprise spending. Also don’t forget slowing growth in China.

Another, completely different area of tech also cooled off: electronic payments. MasterCard (MA) failed to beat revenue estimates, one week after so-so results at rival Visa (V). Additionally, disappointing guidance handed smaller player First Data (FDC) its worst drop ever.

Still it wasn’t all bad news in tech. Chip giant Intel (INTC) beat estimates across the board on a surprising rebound in PCs. Twitter (TWTR) also surprised to the upside as Jack Dorsey got advertisers to pay more per user. Is he cannibalizing FB?

FireEye (FEYE) came in above estimates after successfully transitioning clients to a subscription-revenue model. Traders may want to keep an eye on the cybersecurity stock because transformation stories like this have been a boon for other software names.

Before moving on to other industries, here’s a recap of the problems that that seem to be proliferating in the tech space:

  • Top-line growth is slowing at big Internet firms. This includes both merchandise sales and advertising.
  • Expensive new initiatives haven’t delivered big profits yet.
  • Electronic payments, a key driver of the tech rally, have shown signs of a slowdown.
  • There are rumblings of the cloud-computing/data-center boom slowing.
  • Semiconductors didn’t have much news in the last week but have slowed sharply.
  • Competition is increasing: AMZN’s targeting advertisers and Microsoft (MSFT) is going after AMZN’s cloud business.

Outside of tech, some big consumer stocks have done well.

General Motors (GM) surged higher as strong truck and SUV sales drove better-than-expected results. Investors were especially happy that the automaker managed to raise prices, a potential sign it’s ending years of excessive discounting.

GM’s also offering buyouts to salaried employees. At almost the same time, Ford Motor (F) rallied on optimism about its strategic turnaround plan. Are the automakers finally looking buyable?

Under Armour (UAA) was another winner, up more than 20 percent on strong earnings and guidance. Most of the growth is now coming from global markets like Latin America.

Coca Cola (KO) chart showing historic daily changes.

Coca-Cola (KO) is another old-school name showing new signs of life. Not only did the soft-drinks giant beat profit and sales estimates, it also moved more cases of soft drinks than expected. That could mean its core business is finally recovering from a shift away from sugary sodas.

Speaking of old-school names, remember New York Times (NYT)? The former S&P 500 member jumped to its highest level since 2005 after 18 percent digital-subscription growth pushed earnings and revenue above estimates.

Yum Brands (YUM) also rallied on better-than-expected numbers, thanks to increased traffic at its Taco Bell restaurants. DowDuPont (DWDP) climbed on strong earnings today, although it missed on revenue and is still down 12 percent in the last month.

Then you have the losers. General Electric (GE) crumbled to a new multiyear low after missing across and enduring wider probes of its past accounting practices. No sign of a turnaround yet in this name.

Ditto for Kellogg (K) and Clorox (CLX). K has to boost marketing spend to defend its legacy products, while CLX got squeezed by a strong U.S. dollar and higher commodity costs.

Two stocks that dropped to new 52-week lows were flooring maker Mohawk Industries (MHK) and credit-rating firm Moody’s (MCO). Their businesses may be very different, but they’re both shrinking. MHK is struggling against a weak housing market and MCO anticipates weak debt issuance. (Remember the Federal Reserve is hiking interest rates.)

In conclusion, we just finished the busiest phase of earnings season. Technology stocks mostly showed weakness. But some other big companies in older consumer-facing industries showed signs of getting back on track.

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