Here’s what to watch when earnings season rolls on next week with three key reports that could move entire sectors of the market. Whether that’s good news or bad news, remains to be seen.
After all, it’s been a solid earnings season so far. Between results and guidance, it appears almost certain that corporate cash flow is rising faster than it has since 2011. At the same time, the headline 3% yield in U.S. Treasuries has spooked some investors. As a result, the S&P 500 is basically back where it was three weeks ago.
From a long-term standpoint, I still believe that presents a buying opportunity. History shows that stocks can rise even with yields above 3% — or even 4%. And the type of earnings growth being generated at the moment generally leads equities to rally.
But when that rally will begin in earnest remains the key question. And these three reports may go a long way toward answering it. A tech giant that has brought down an entire sector amid growth concerns will get a chance to shore up its bull case. One of the market’s most divisive stocks will try and prove its ship has been righted. And a classic high-multiple growth stock will show how willing investors are to pay up for quality.
Next week will be big for the market as a whole as these three reports likely will color how investors react. Here’s what to watch:
Watch to Watch: Shopify (SHOP)
Earnings Report Date: May 1 before market open
For the most part, investors seem to agree that Shopify Inc (NYSE:SHOP) has a valuable business. The question comes down to what it’s worth.
To be sure, short-seller Andrew Left of Citron Research has criticized the company. But even his bear case still values SHOP stock in the range of 5-6x revenue. Whatever the accuracy of Citron’s claims about customer churn and affiliate practices, Shopify has a real opportunity in serving small businesses. And in an era where consumers increasingly prefer “small” to “big,” that creates an attractive multi-year growth runway for SHOP.
It also sets up an opportunity for Shopify in Tuesday morning’s report. Left’s first broadside back in October sent SHOP shares tumbling from $120 to $90. But starting in early December, the stock would run about 70% higher in barely three months before Left again took aim.
With the Street still behind the story — the average target price of $145 suggests 17% upside — a strong first-quarter report could lead history to repeat itself. A Q1 beat could calm investor fears and turn the focus back to Shopify’s investment opportunity. But that scenario requires both strong earnings, which appear likely. It also requires a market willing to pay more than 10X revenue and 200X earnings for that opportunity.
It’s the latter aspect that in this market may be more difficult. If investors are willing to jump in, however, that bodes well for other high-flyers in the space like Square Inc (NYSE:SQ) — and for growth stocks across the board.
What to Watch: Apple (AAPL)
Earnings Report Date: May 1 after market close
The fiscal Q2 report from Apple Inc. (NASDAQ:AAPL) is simply huge – and not just for Apple. AAPL stock has fallen 9% in just the last eight trading sessions, as fears about iPhone X sales continue to mount. The concerns have bled over into other sectors – notably the chip space. The Philadelphia Semiconductor Index (known as the ‘SOX’) has fallen over 7% during that stretch.
Apple has a chance to stem the bleeding on Tuesday afternoon – but I wouldn’t be rushing into AAPL just yet. Analysts clearly have turned on the story here. Estimates continue to come down, with Bernstein cutting its outlook on Friday. One analyst this week wrote that the Street is in “full panic mode“, as supply chain checks show weak demand for the X.
Even if Apple’s numbers beat, it may not be enough to change that sentiment. The long-running bear case for AAPL has been based on the idea that smartphone sales are going to peak. As replacement cycles lengthen and lower-end products improve, iPhone sales are going to slow, and eventually, growth will turn negative.
Increasingly, some analysts and investors appear to believe that peak has arrived. And barring a massive quarter, Apple probably can’t change their minds on Tuesday. Still, a beat on Tuesday could at least end the recent pullback, and stabilize both AAPL and the stocks of many of its suppliers. And given Apple’s still-huge market capitalization near $900 billion, a bounce in Apple stock could move broad indices (notably the price-weighted Dow) on Wednesday.
What to Watch: Tesla (TSLA)
Earnings Report Date: May 2 after market close
The quick-and-dirty way to measure an earnings report typically is to first look at whether the quarter’s numbers beat analyst consensus in terms of revenue and EPS. For Tesla Inc (NASDAQ:TSLA) on Wednesday, sales and profits are going to get limited investor attention, at best.
The only numbers that likely will really matter are the company’s cash burn during the quarter and its liquidity at the end of Q1. Analysts, investors, and even rating service Moody’s are convinced that Tesla will have to raise capital this year. CEO Elon Musk has argued otherwise. The numbers released on Wednesday afternoon will better show if the skeptics are right.
Those two numbers aside, trading in Tesla stock on Thursday likely is going to come down to the company’s post-earnings conference call. With reports swirling about Model 3 production, Musk will have a chance to convince the Street – and the market – that the company is moving in the right direction.
It’s no doubt a big quarter for Tesla – and it leads to a very real risk of a significant decline in TSLA stock. I recommended TSLA at the beginning of 2017, ahead of its big run — but it’s difficult to have that same optimism at the moment. The chart does not look particularly healthy, with an early April rally based on better production numbers already fading. Investors are tired of missed targets and broken promises. Analyst price targets have come down steadily, and will continue to do so if Q1 disappoints at all.
Tesla just doesn’t have much room for error in this report. If Musk can work his magic, and convince the market that he’s righted the ship, there’s an easy path to $300 and beyond. But given all the challenges, and all the news of late, that seems like a big ask. If investors interpret the Q1 report to mean that Tesla is going to have to issue more stock and that Model 3 targets are again going to be missed, TSLA’s decline is going to accelerate.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.