Wednesday, July 11, 2018

Tech Stocks: What To Watch In Earnings Season And Trade Wars

Tech Stocks are about to start reporting earnings next week. Fundamental trends should have been strong for Q2 but the question remains will trade fears slow spending in Q3? Which way will guidance go for companies on their earnings calls? We think guidance keeps moving higher but that's very much in question and we're looking for clues.

President Trump followed through on upping the ante on tariffs with a new $200B of targeted goods. China has said it would respond which probably occurs when the US tariffs go into effect in the Fall.

Will Q3 Guidance Be Affected By Trade War Concerns?

In the meantime we're focused on reported earnings which start for, our focus, tech stocks next week. There will be a ton of conjecture if current trade friction slowed demand until we actually hear it in the earnings calls.

We're collecting clues ahead of those calls.

We've said we don't think that demand trends would have slowed much. If they did they are coming off super-strong Q2 levels. Even if the Q2 pace slows Q3 might still beat Street estimates. That will come out in guidance and that's really what should matter for the stock action on earnings.

Reporting next week in our universe that will shed some light on trade-war affected demand trends are IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT).

Netflix (NASDAQ:NFLX) reports Monday after the close but has less exposure to trade friction.

Can The New Secular Dynamic, Enterprise, Offset Trade Concerns?

We've been picking up that enterprise customers are starting to spend big for the first time in years. Up until maybe a couple of quarters ago, the majority of the spending growth was led by cloud/hyperscalers like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Facebook (NASDAQ:FB).

More recently though enterprise customers, traditional companies, are starting to upgrade their tech. There had been a multi-year trend to roll-out usage in the public cloud. More recently though, specifically this year, traditional companies are starting to more aggressively build out their own internal technology infrastructure. It's an upgrade cycle.

We think that upgrade cycle can benefit many tech stocks this year.

So that's the Q2 story.

For now we think that trend should be strong enough to have spillover demand into Q3 offsetting any CEO concerns on trade. That's our guess for now, which could change as we collect data. That Q3 take by companies on their earnings calls will be key in how the stock prices react. That's what to watch next.

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We have no holdings in the stocks mentioned unless otherwise noted.

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