For the most part, large-cap tech companies have turned in a pretty strong earnings season.
With many tech companies having either seen business improve or only soften moderately since the first COVID-19 lockdowns took hold in March, a long list of tech firms have comfortably beaten calendar Q2 analyst estimates over the last few weeks. Along with tech giants, the list includes:
- Companies with strong e-commerce exposure, such as PayPal (PYPL) , Shopify (SHOP) and eBay (EBAY) .
- Enterprise software firms such as SAP (SAP) , ServiceNow (NOW) and RingCentral (RNG) .
- Game publishers such as Electronic Arts (EA) , Take-Two Interactive (TTWO) and Activision Blizzard (ATVI) .
- Chip developers such as AMD (AMD) , Qualcomm (QCOM) and Texas Instruments (TXN) .
- Chip equipment makers such as Lam Research (LRCX) , KLA (KLAC) and Teradyne (TER) .
- Consumer Internet companies such as Snap (SNAP) , Chegg (CHGG) and Match Group (MTCH) .
There have been some large-cap tech names that have missed Q2 estimates. However, a lot of the misses have either been due to company-specific issues (for example, Twitter (TWTR) ) or high exposure to markets already known to be seeing weak demand (for example, Expedia (EXPE) and Seagate (STX) ).
Such exceptions aside, reporting tech companies haven’t done much to weaken the market’s enthusiasm for growth tech companies — enthusiasm that (with assists from massive fiscal stimulus and a very dovish Fed) has the Nasdaq flirting with 11,000 and quite a few high-growth names sporting stratospheric forward sales and/or earnings multiples.
For that reason — as much as parallels to the Dot.com bubble have been growing, and as much as it’s worth remembering that equity bubbles can involve highly profitable companies in addition to unprofitable ones — trying to time a market top in an environment such as this one feels pretty risky. The animal spirits of capitalism are running wild right now, and when it comes to growth tech companies at least, there isn’t a lot of bad news arriving to restrain them.
With that said, it’s worth noting that solid sales and EPS beats weren’t enough in some cases to keep tech stocks that had rallied strongly since late March from trading lower post-earnings during the last week or so.
Alphabet (GOOG) , whose exposure to travel and brand video ad spend remains a headwind, is one notable example. Others include ServiceNow, RingCentral, Twilio (TWLO) and Cirrus Logic (CRUS) . This is perhaps one sign that the bar is getting set higher now, and that gains might not come as easily in the coming months.
And in the wake of a -32.9% Q2 GDP print, it’s safe to say that macro risks haven’t gone away. Two that I think are worth watching in particular: Any softening of consumer spending that stems from the next stimulus bill providing smaller unemployment insurance benefits than the last one, and (given that many of these companies haven’t announced major layoffs yet) larger layoffs and spending cuts among companies seeing revenue declines, such as travel/hospitality firms, automakers, banks and energy companies.
Also, for some tech companies benefiting from elevated demand over the last few months, there’s a risk that (as Netflix (NFLX) has cautioned) a portion of the demand strength that they’re seeing represents a pull-forward of growth that would have otherwise happened in the following year or two, and that higher growth now will contribute to lower growth later.
But until such macro and/or industry-specific pressures start raising alarm bells, or until earnings news flow starts looking meaningfully worse that it has in recent weeks, the investor euphoria that has so many tech stocks trading at such lofty heights could be tough to fully eradicate.
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