Though some stragglers such as Alibaba Group Holdings (BABA) , Priceline Group Inc. (PCLN) and Snap Inc. (SNAP) remain, the lion’s share of tech companies due to report June quarter earnings have now done so. On the whole, markets seem pleased with what they’ve seen: The Nasdaq is up 4% over the past month, outpacing the S&P 500’s 2% gain, and is now up 18% on the year.
Here are some big-picture takeaways from the dozens of reports that have come out since mid-July.
1. Life remains good for the tech sector’s “Big 5.”
Apple Inc. (AAPL) and Facebook Inc. (FB) shot higher after beating estimates and providing upbeat commentary about future demand, while Alphabet Inc./Google (GOOGL) and Amazon.com Inc. (AMZN) saw profit-taking due to spending/margin concerns and Microsoft Corp. (MSFT) slipped slightly after beating estimates and providing conservative guidance. But it’s hard to raise major complaints about how any of these companies are performing business-wise.
Apple saw healthy sales growth in all major regions except for China, reported a surprising iPad sales rebound and continued Services strength, and issued guidance that soothed fears about major iPhone 8 production delays. Facebook and Google further solidified their online ad dominance, with Facebook offsetting an expected news feed ad load slowdown with things like ad price and Instagram growth and Google continuing to post phenomenal mobile search and YouTube ad growth.
Amazon’s North American e-commerce growth accelerated in Q2 and AWS posted 40%-plus growth for another quarter. Microsoft showed once again that cloud app and service adoption are a net positive for its top line, even as older revenue streams get cannibalized.
One can find some minor faults. For example, Google’s traffic acquisition costs (TAC) continue rising as a percentage of ad sales, and as this is being driven by mobile ad growth (especially iOS ad growth), there aren’t any quick fixes. Facebook’s sequential daily active user (DAU) slightly trailed its monthly active user (MAU) growth, after many quarters of the opposite being true. But the trends and competitive advantages that have led the big-5’s shares to perform so well over the past few years are generally still in place.
2. Boom times continue for many chip and chip equipment firms, but a lot has been priced in.
A long list of chip developers and chip equipment makers beat Q2 estimates and issue solid Q3 guidance. But only a portion of these companies ended up rallying on the news, as anything short of truly stellar numbers tended to yield a measured or even harsh response among investors holding large paper profits.
Thus while Texas Instruments Inc. (TXN) and Microchip Technology Inc. (MCHP) gained after posting strong results and guidance on the back of strong auto and industrial chip sales, peer Cypress Semiconductor Corp. (CY) fell slightly after turning in a beat-and-raise report. Likewise, mobile chip suppliers Skyworks Solutions Inc. (SWKS) and Cirrus Logic Inc. (CRUS) sold off after beating estimates and issuing healthy guidance.
Among chip equipment makers, photolithography equipment giant ASML Holdings NV (ASML) rallied after sharing results and order data that pointed to both strong capital spending among memory makers and growing chipmaker investments to deploy next-gen EUV lithography systems in the coming years. But Lam Research Corp. (LRCX) and KLA-Tencor Corp. (KLAC) each slid in spite of delivering above-consensus numbers.
The market’s mixed reactions to such reports don’t necessarily mean that the big chip stock rally that started in early 2016 is finished. Particularly since industry conditions still look pretty good. But it does suggest investors will need to be more selective going forward to achieve outsized gains.
3. As IT spending keeps shifting to the cloud, it’s causing some big earnings beats and misses.
Data center switch vendor Arista Networks Inc. (ANET) , which depends heavily on sales to cloud giants such as Facebook, Amazon and Microsoft, rose 19% on Friday after delivering blowout results and guidance fueled by soaring cloud capital spending. IT hardware and software firms whose sales skew more towards on-premise enterprise infrastructures often had very different numbers to share.
IBM Corp. (IBM) sold off after reporting its 21st consecutive revenue decline amid weaker-than-expected software and services sales. F5 Networks Inc. (FFIV) , whose enterprise application delivery controller (ADC) sales have been pressured, tumbled after missing Q2 revenue estimates and issuing soft Q3 guidance. Seagate Technology PLC (STX) plunged after a big Q2 miss, partly because a relatively weak position in the market for the high-capacity helium hard drives loved by cloud giants meant cloud growth wasn’t able to offset enterprise weakness.
All of these numbers came as 42% and 97% annual sales growth was respectively reported for AWS and Microsoft Azure. And while Google doesn’t break out Google Cloud Platform (GCP) growth, all signs point to it remaining very strong. Well-positioned companies can still grow their on-premise IT sales, especially if they have good exposure to growth areas such as security and analytics. But the total pie is clearly shrinking, and the pace might be accelerating.
4. The optical component space is proving very challenging to play.
Optical component stocks slumped on Wednesday after analog chip and optical component supplier MACOM Technology Inc. (MTSI) missed estimates and issued very weak guidance, while blaming a pause in component sales related to Chinese fiber deployments. They tumbled again on Friday after NeoPhotonics Corp. (NPTN) also posted disappointing numbers blamed on China, and previously high-flying Applied Optoelectronics Inc. (AAOI) issued weak guidance blamed on a drop in 40-gig component orders from a major cloud data center client ahead of a 100-gig ramp. These numbers are overshadowing relatively healthy reports from Oclaro Inc. (OCLR) and Acacia Communications Inc. (ACIA) .
The upshot: Component makers have been depending heavily on orders from a handful of telecom equipment makers supplying Chinese carriers, and a handful of cloud giants. If some carriers or cloud giants pause their capex, or if share is lost at a major client, things can get ugly in a hurry.
There are still good reasons to be upbeat about the industry. Total cloud capex is still surging, interest in 100-gig upgrades remains high among both cloud giants and carriers and Chinese investments simply seem to be paused rather than canceled. For Finisar Corp. (FNSR) and Lumentum Holdings Inc. (LITE) , sales of lasers meant to enable the iPhone 8’s reported 3D depth-sensing abilities are also a growth driver. However, unless one has a very good read on a particular supplier’s sales trends, taking a “basket” approach to investing in the group might be much safer than picking winners and losers.
5. At current valuations, it can pay to go bargain-hunting.
Fitbit Inc. (FIT) and GoPro Inc. (GPRO) , frequently written off as dead in the water, each rose sharply this week after sharing better-than-expected Q2 reports. Baidu Inc. (BIDU) , whose shares had easily underperformed those of fellow Chinese Internet giants Alibaba and Tencent over the last two years, surged after delivering a beat-and-raise quarter. Yelp Inc. (YELP) , Hortonworks Inc. (HDP) and SolarEdge Technologies Inc. (SEDG) are some of the other formerly-pressured names to shoot higher after releasing market-pleasing reports.
Of course, not every company trading at relatively low sales and/or earnings multiples saw such a post-earnings reaction. IBM is a good case in point. A lot of companies deserve to sport depressed valuations. However, in an environment where more richly-valued names are often trading flat or down following strong reports due to how much has been priced in, it can be worth taking a look at cheaper stocks in the name of uncovering some hidden gems.