Tech stocks are a great place to find growth, especially with the megatrends of mobile, social media and cloud computing. But the recent quarterly reports in the industry point to weakness, not strength.
Just look at Apple (APPL). In its fiscal first quarter, the company’s revenues grew only by 5.7% to $57.6 billion and net income was flat at $13.1 billion. While earnings per share (EPS) did increase by 5% to $14.50, this was mostly due to heavy share buybacks.
But Apple is not alone. In recent weeks, there have been other tech stocks reporting lackluster earnings.
So what are the themes that are emerging so far? And how might investors play this with upcoming earnings reports of other tech stocks?
Let’s take a look:
Tech Stocks Struggle With Mobile
Mobile is supposed to be the elixir of growth for tech stocks, right? Perhaps not. If anything, Wall Street may have been too overeager — which is pretty normal with any industry that is undergoing major changes.
Apple certainly highlights some of the issues. For the most part, it looks like the high-end market may be hitting saturation levels, as seen with the 51 million iPhone shipments in Q1, which came in under expectations. Wall Street was expecting a much more robust 55 million, and the “whisper number” was a couple million higher. Apple still disappointed, despite having released two new devices as well as locking in some key distribution deals in China.
But other mobile-operator tech stocks have also also feeling the pressure. Consider Samsung, which saw a 6% drop in profits to $7.7 billion in the latest quarter. A 9% decline in mobile devices revenues, which was probably due to price reductions, was the major contributor.
LG also reported a drop in earnings, showing that even mobile parts makers are feeling the hit.
So if mobile is undergoing a bit of a lull, this could be a big problem for many high-flying tech stocks like:
- Facebook (FB): Reports Q4 results on Jan. 29th after the bell
- Twitter (TWTR): Reports Q4 results on February 5th after the bell
- Google (GOOG): Reports Q4 results on Jan. 30th after the bell
- Qualcomm (QCOM): Reports fiscal Q1 results on Jan. 29th after the bell
Emerging Markets
For its fourth quarter, IBM (IBM) had another lackluster performance. As a result, CEO Gini Rometty recommended to her board that senior managers not get their 2013 incentive payments.
Now there are company-specific issues involved for IBM’s woes. For example, the company has been too slow to move into cloud computing. It also looks like it has did not exit various hardware businesses fast enough, either.
Yet IBM has been suffering from something else that may have broader implications on the tech world — a slowdown in emerging markets. In fact, the biggest weak spot has been China, which has seen a 26% year-over-year decline in all categories.
During the past week, the turmoil in emerging markets has only become more pronounced. With the Federal Reserve’s moves to “taper” its easy monetary policy, the impact has been wrenching on currencies and interest rates. In such an environment, it could be easy to push out expenditures on high-priced technologies.
At the same time, there may be political considerations as well. With the NSA revelations not going away, it may be an excuse for countries like China to encourage the purchase of technologies from domestic vendors.
And watch out for other tech stocks that have exposure to emerging markets and release earnings soon, such as:
- Cisco (CSCO): Reports fiscal Q2 results on Feb. 12th after the bell
- EMC (EMC): Reports Q4 results on Jan. 29nd before the bell
- Broadcom (BRCM): Reports Q4 results on Jan. 30th after the bell
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
