We are in the thick of tech earnings season with some major earnings releases already in the kitty.
We’ve had Netflix NFLX, which despite its strong earnings beat of 25.8% (following three quarters of misses) was clobbered by the market because of weak subscriber adds and outlook. It’s another story that 12 of the 15 analysts providing estimates for the company raised their estimates for the year by an average 4.3% since.
This Zacks Rank #3 (Hold) company is currently expected to grow earnings an impressive 68.4% this year on revenue that will grow 19.2%. 2022 estimates are trending down however, which could mean that the shares will be range-bound in the near future.
Zacks #3-ranked Snapchat SNAP did much better, with a much stronger beat of 100%, following two quarters of strong beats (4-quarter average was 61.3%). Subscriber additions of 51 million surprised many on Wall Street. North America subs and ARPUs were particularly strong. Consequently, the shares soared.
Estimates have yet to be adjusted, but at current levels, represent 316.7% earnings growth on 53.6% revenue growth. Needless to say, this stock looks good. So, it could be in for a rating change soon.
Now moving on to Intel INTC, which is depressing to say the least. The Rank #4 (Sell) company shows every sign of continued data center share bleeding, as well as an intensified focus on a foundry business that it looks like it badly needs, considering the increased competition. Both NVIDIA NVDA (which will have its own AI-focused ARM-based chip in 2023) and more immediately, Advanced Micro Devices AMD with its EPYC offerings are going to make life really difficult.
There’s also news that long-time data center customers Amazon and Microsoft are developing in-house tech. The data center is really very the battle royal is unfolding. It’s where Intel has the most to lose because it’s a market the company has dominated for long and it’s a market that offers big margins.
Intel usually beats estimates and this quarter was no different. We’ll have to wait a bit to see which way analysts take their estimates. But my guess is, they will be moving down because of revenue loss and also because of margin erosion (Intel is talking to 50+ foundry customers). Intel’s 2021 guidance also indicates margin erosion.
One struggling company that investors did reward was IBM IBM. Not only did the company beat both top and bottom line expectations, but it also managed to keep operating cash flow growing.
SVP and CFO James Kavanaugh’s statement “With strong cash generation and disciplined financial management, we increased investments in our hybrid cloud and AI capabilities, while significantly deleveraging in the quarter and supporting our commitment to a secure and growing dividend” gives the main points we should be looking at.
The company has doubled down on hybrid cloud (Mordor Intelligence estimates market growth of 18.7% between 2020 and 2026) and artificial intelligence (where IBM software platforms were ranked #1 in market share by IDC). It is focused on paying down all the debt taken to acquire Red Hat, which is a key link in its hybrid cloud strategy and is growing rapidly under IBM management.
Chairman and CEO Arvind Krishna also said, “While we have more work to do, we are confident we can achieve full-year revenue growth and meet our adjusted free cash flow target in 2021.” Although he didn’t specifically mention what those targets were.
The 2021 Zacks Consensus Estimate for this Rank #3 company is down 2.6% in the last 7 days although the 2022 estimate is up a penny.
And now for the buy-ranked stocks-
Zacks #1 (Strong Buy)-ranked Lam Research LRCX is an obvious bet, considering the current chip shortage that is expected to continue into next year. This has sent chip producers racing to add capacity. Even after the shortage is ironed out, the demand for chips will continue to increase as they are incorporated into virtually everything. So, we are in a build cycle that is likely to be protracted, which is the perfect environment for equipment makers.
LRCX topped the Zacks Consensus Estimate by 14.2%, the strongest beat in a while. And that came off revenues that also beat by a good margin. Earnings and revenues were up a respective 88.2% and 53.7% from last year.
The 2021 Zacks Consensus Estimate for earnings is up 5.4% in the last 7 days while the 2022 estimate is up 15.9%. Since the company’s fiscal year ends in June, most of the equipment purchases expected of Intel, Taiwan Semiconductor and the other big spenders won’t come in the current year but in the next.
Another stock benefiting from the same trends is Zacks #1 ranked ASML Holding N. V. ASML. The company offers DUV and EUV lighting solutions that are imperative for semiconductor manufacturing.
ASML topped revenue and earnings estimates by a respective 8.6% and 25.3%. Revenue was up 95.4% and earnings were up 274.8%. Results were well above management’s targets and driven by increased traction for software upgrades within the installed base that can increase capacity of existing equipment.
Secular mega trends like 5G, AI and HPC also fueled demand at both advanced and mature nodes in logic and memory. Guidance was also increased to 30% revenue growth in the current year.
The Zacks Consensus Estimate for 2021 jumped 15.6% in the last 7 days. The 2022 estimate is up 15.0%.
Zacks #2 (Buy) ranked Plexus Corp PLXS offers electronic contract manufacturing services primarily to healthcare/life sciences, industrial/commerce, aerospace/defense and communications OEMs.
Its quarterly revenue was in line with management estimates and analyst projections. Earnings exceeded both management and analyst projections, beating the Zacks Consensus Estimate by 19.2%. PLXS won 42 new manufacturing programs including a number of meaningful new customer engagements, with the potential to generate further growth.
Management expects the strong demand environment to continue into quarter three, particularly in the healthcare/life sciences segment. Guided EPS of $1.23 to $1.38 ($1.31 at the midpoint), was well below the Zacks Consensus Estimate of $1.18.
Government contractor CACI International, Inc. CACI concludes this list. The company’s IT applications and infrastructure improve communications, secure information system and network integrity, enhance data collection and analysis, and increase efficiency and mission effectiveness of the DoD, federal civilian agencies, state and local governments, as well as certain other commercial operations.
The company’s earnings grew 67.1% over the prior year to beat the Zacks Consensus Estimate by 43.1%. Revenues grew 5.9% to miss the Zacks Consensus by a sliver.
The company’s investment thesis stands on its customers’ critical national security and IT modernization priorities that have suffered from travel restrictions, reduction in government processing of deployment orders and delays in task orders, all driven by the pandemic.
As a result, it lowered its 2021 revenue expectations by $112.5 million, or 3.6% (at the mid-point). Important to note in this context is the fact that backlog increased 12.3% from a year ago while funded backlog increased 1.3, indicating that demand remains steady.
Additionally, the EPS guidance was raised by $3.34, or 22.5% at the mid-point because of strong operating performance, lower program and indirect expenses, and certain tax benefits, 19.2% above the Zacks Consensus Estimate.
The company has also entered into an accelerated share repurchase (ASR) agreement to repurchase $500 million of common stock.
Price Performance Over the Past Month
The Technology sector as a whole is expected to grow earnings 24.9% from the same period last year on 18.4% higher revenues. But results from the first crop of companies seems to indicate that revenue growth is trending below expectations. Earnings however are coming in above expectations. But this is the biggest week for tech stocks. So let’s see what this week brings on.
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