Tech companies are bracing investors for what could be the worst quarter from a revenue perspective in more than six years.
With first-quarter earnings season nearing, information technology firms have been revising their forward guidance considerably lower. In all, 31 companies have issued negative revenue guidance, which is well above the five-year average of 20 and the highest level since the 36 that did so in the fourth quarter of 2012, according to FactSet.
The revised expectations come against a generally dismal backdrop for corporate profits.
S&P 500 companies collectively are expected to show a 3.7 percent decline in earnings per share. If that holds, it will be the first negative reporting period since the second quarter of 2016. The large-cap index is still expected to see positive profit growth for the year, with FactSet projecting a 3.8 percent year-over-year increase, though that number has been trending lower.
Investors haven’t seemed to care about the declining outlook.
The Nasdaq, which has a comparatively high tech composition compared with the other major indexes, is up more than 16 percent year to date. Companies that have lowered guidance have seen an average 0.7 percent price drop over the next four days, the lowest since FactSet began tracking the metric in 2009.
Earnings in 2018 were stellar, with the S&P 500 reporting a 20 percent gain thanks in large part to a 112.4 percent surge in energy. Technology stocks were near the back of the pack among the 11 index sectors, with a 14 percent increase from 2017.
Energy and tech are the only sectors projected to show year-over-year revenue drops, with respective declines of 3.3 percent and 1.1 percent, according to current estimates. In tech, semiconductors and equipment are forecast to show an 8 percent revenue slide, while tech hardware, storage and peripherals are looking at a potential 6 percent drop. Software is expected to be the strongest revenue performer with a 10 percent rise.
Apple and Intel are the big drags
As revenue looks to disappoint, so does profit.
On simple earnings per share, information technology has been by far the greatest number of downgrades, with 26 companies lowering expectations against just 13 raising. The 26 percent of total companies in the sector issuing negative guidance is well ahead of the five-year average of 20.2 percent, according to FactSet records. It’s also the highest level of companies issuing downgrades since the first quarter of 2016.
Apple and Intel have been the biggest contributors to the negative EPS picture, which has seen expectations for the sector to go from a 3 percent Q1 drop to a 10.7 percent slide.
Markets will focus on earnings results going forward, strategist says 9:51 AM ET Thu, 21 March 2019 | 04:27
Apple has cut its earnings expectations to $2.39 from $2.95 while Intel has gone to 87 cents from $1.01. Both companies have seen double-digit percentage gains in their share prices.
Other companies that have turned pessimistic include Hasbro, which now expects a 9 cent per share loss after initially guiding for a 19-cent profit, NVIDIA, which cut to 62 cents from $1.30, and a slew of oil majors, including ExxonMobil, whose guidance went to 88 cents from $1.15.
At a broad index level, 105 companies have issued guidance, with 77 going negative. That 73 percent rate is above the five-year average of 70 percent.
Health care has also been lowering its revenue expectations sharply. So far, 16 companies have revised lower, which would be highest number since FactSet began tracking the numbers in 2006. On the upside, health care is expected to post the second-highest EPS growth of all sectors at 4 percent.