With the Nasdaq now above 9,000, tech companies large and small will be under the gun this earnings season to make good on Wall Street’s faith in them.
Here are five important things to watch as tech firms release their calendar Q4 reports in the coming weeks.
1. Chip Manufacturing and Cloud Capex Trends
Following a big 2019 for shares of chip equipment firms, investors in these companies will want to keep an eye on the 2020 capex budgets set by big-3 chip equipment buyers Intel (INTC) , Taiwan Semiconductor (TSM) and Samsung.
Intel, which stepped up its capex in 2019 amid supply constraints, has forecast 25% 2020 capacity hikes for both its 14-nanometer (14nm) and 10-nanometer (10nm) manufacturing process nodes. And TSMC, enjoying the fruits of a newly-won manufacturing technology lead, has forecast its 2020 capex will be “somewhat similar” to 2019’s elevated level of $14 billion to $15 billion.
Samsung is more of a wild card; its giant memory business has (like those of peers) slashed capex over the last 12 months, but NAND flash memory prices have begun rebounding lately. Also, Samsung could step up how much it spends in support of its logic (processor) and foundry (contract manufacturing) operations.
Investors in chip and hardware firms with strong cloud data center exposure should track what Internet/cloud giants such as Alphabet/Google (GOOGL) , Facebook (FB) and Amazon.com (AMZN) signal about their 2020 capex plans (Facebook sets a formal capex budget, but Google and Amazon don’t). Over the last three months, there have been plenty of signs that cloud capex is picking up again, after having cooled off during the first half of 2019.
2. How the Chip Recovery is Progressing
Though the chip industry went through a cyclical downturn in 2019, chip stocks had (following a late-2018 plunge) an epic year, as the downturn proved tamer than feared and trade war-related worries gradually cooled.
Now, markets will be looking for clear signs that the demand improvement many have reported seeing in recent months is (after adjusting for seasonal weakness) set to continue during the first half of 2020. In addition to cloud demand (previously mentioned), things to watch auto/industrial chip demand (showing some signs of rebounding), memory demand and pricing outlooks (NAND looks stronger than DRAM right now), smartphone chip sales (due to get a lift from the higher chip content of 5G phones) and demand from telecom equipment makers (has remained under pressure, but should benefit from 5G rollouts).
Last week, microcontroller and analog/mixed-signal chip supplier Microchip Technology (MCHP) shared a bit of good news for the chip sector. Several of Microchip’s peers will be among the companies reporting in the coming weeks.
3. Online Ad Sales
Q4 is by far the seasonally biggest quarter for ad sales. And all signs point to online ad sales having once more grown strongly, even if some industry players did better than others.
Online ad giants Google and Facebook, both of which posted strong Q2 and Q3 reports, will be reporting in the coming weeks. As will Amazon, whose e-commerce ad business continues registering strong growth. Other notable online ad players that will be reporting include Twitter, Snap, Pinterest, Roku and The Trade Desk.
4. Cloud Sales Growth
With Microsoft’s (MSFT) public cloud momentum getting a little more attention lately, the revenue growth rates reported for Amazon Web Services (AWS) and Microsoft Azure could get more scrutiny than usual. For calendar Q3, Amazon (still by far the biggest public cloud player) reported AWS’ revenue grew 35% annually to $9 billion, while Microsoft reported 59% Azure growth (as usual, no revenue figure was given).
Alphabet doesn’t share sales figures or growth rates for the Google Cloud Platform (GCP). But the company did mention in July that its total cloud revenue, which also covers the G Suite productivity suite, had reached an $8 billion annual revenue run rate. Another disclosure could arrive on Alphabet’s Q4 call.
5. IT Spending Trends
Many publicly-traded IT hardware and software firms have fiscal quarters that end in January rather than December. But between those that do report over the next three weeks and the chip suppliers that will do so, we should get some color about how IT spending budgets look as 2020 kicks off.
IBM (IBM) , Intel and Arista Networks (ANET) are among the notable enterprise hardware and chip suppliers that will be reporting. Microsoft, SAP (SAP) and ServiceNow (NOW) headline the list of major software firms with calendar Q4 reports to deliver. A few noteworthy security tech firms, such as Check Point Software (CHKP) and Fortinet (FTNT) , are also on deck.
Enterprise hardware spending weakened a lot over the course of 2019, as businesses chose to direct a larger portion of their IT budgets elsewhere. Enterprise software spend has generally remained healthy, but it’s worth keeping in mind that current valuations for the group already price in a lot of growth.
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