This could be the peak of the tech boom — Here’s what to look for

As tech companies begin reporting more huge profit and sales totals this week, the question to ask is how long the heady growth can continue.

Investors have witnessed unprecedented growth in mature technology companies during the pandemic, with the five biggest tech giants — Google parent Alphabet Inc. GOOG GOOGL, Inc. AMZN, Apple Inc. AAPL, Facebook Inc. FB and Microsoft Corp. MSFT — putting up a staggering $1.2 trillion in revenue and $244 billion in net profit in the first 12 months of COVID-19’s assault on the globe. It is expected to continue, with information technology companies in the S&P 500

expected to see earnings growth of about 30%, and revenue growth of 17% for the quarter ended June 30, according to FactSet, even as many global economies have been slowly reopening from pandemic shutdowns.

Read more about Big Tech’s trillion-dollar pandemic year

That growth from last year is not as strong as it may appear, though: This quarter is going to be an easy comparison with the year ago period, which was the first full quarter of the COVID-19 pandemic, and the beginning of lockdown across the U.S.

“We have to remember that the numbers are going to look and sound incredible, but it has to be compared to a quarter that was the worst of the year,” said Brendan Connaughton, founder and managing partner of Catalyst Private Wealth in San Francisco.

While this quarter’s numbers are likely to be huge, there are a few signs that the tech boom is deflating: warnings such as a recent one from Netflix Inc.
decelerating revenue growth at Amazon, hints of a slowdown in PCs, the continuing chip shortage and some early mentions of effects on online ads from an Apple crackdown.

The biggest week for earnings: Apple, Microsoft, Google, Facebook, Amazon and Tesla are the main attractions

At the end of June when the second quarter ended, many cities were reopening, and some even had small numbers of office workers beginning to partially return to the office in the hybrid work model that many companies are adopting. Some movie theaters, restaurants and amusement parks started to reopen, affecting streaming companies like Netflix and other online entertainment sites.

“The pandemic has created unusual choppiness in our growth and distorts year-over-year comparisons as acquisition and engagement per member household spiked in the early months of COVID,” Netflix executives said in their quarterly shareholder letter last Tuesday. Engagement in the second quarter was down compared with “those unprecedented levels” but it was still up 17% compared with the more comparable second quarter of 2019.

See: More about Netflix’s earnings and complicated entry into videogames

That will also include Amazon, the company an NYU professor has described as made for the pandemic, which is expected to see a deceleration of its hefty revenue growth. The consensus among analysts is that Amazon will see revenue of $115.3 billion in the second quarter, with year over year growth of about 30%, a slowdown from a 43.% surge in the first quarter, and 43.5% in fourth quarter.

“We expect strong top-line growth in ’21, albeit decelerating vs. pandemic charged ’20,” said John Blackledge, a Cowen & Co. analyst, in a recent note.

Another pandemic boom that is now starting to fizzle is PC sales, which saw unexpected growth when consumers and companies bought new devices, services and tools for employees who suddenly needed an office at their house. The current supply/demand fluctuations in chips continue to drive strong semiconductor sales, but PC makers and chip makers are expected to start to see some slowing of demand from the huge sales fueled by working from home.

For more: PCs are booming during the pandemic

While Intel Corp.

reported a better than expected second quarter, its report was also marred by lower than expected average selling prices, and a slightly disappointing outlook for the third quarter, even with CEO Pat Gelsinger predicting further growth in PCs into the next year. But analysts have warned about a possible correction in the PC market in the second half of the year.

“We believe that some PCs purchased during COVID were pulled-in and may weigh on future periods (which does not seem to be contemplated by the Intel team),” Christopher Rolland, an analyst with Susquehanna Financial Group, wrote in a note to clients.

For the most part, though, software, cloud computing providers and apps, and semiconductor makers are still expected to see continued strong gains, as cloud computing takes a stronger hold and the need for security services and software continues unabated. The overall electronic equipment sector and semiconductors are expected to see the highest year-over-year revenue growth rates among the information technology sector of the S&P 500, according to FactSet.

Electronic equipment, which includes some little known but fast growing companies, is forecast to see blended revenue growth of 27%. Zebra Technologies Inc.

has predicted second quarter adjusted revenue growth of 38% to 42%. Zebra, which makes tracking and inventory management equipment, said it expects strong demand due to pent-up customer demand from the pandemic. Its shares have soared 95% in the past year and Barron’s reported its customers range from Amazon to brick and mortar retailers like Home Depot Inc.

Semiconductors is right after electronic equipment with high revenue growth expectations of 24%. Two of the standouts in semis are Intel rival Advanced Micro Devices Inc.,
which is expected to see about 89% revenue growth from the year ago second quarter, as it continues to take market share from Intel.

For more: See MarketWatch’s AMD earnings preview

Nvidia Corp.

is another highflier in the semi group, with expected revenue growth of about 64% in the second quarter, as gaming sales have surged and the additional revenue from crypto-mining focused cards as icing on the cake.

Software, on average, isn’t growing at quite the same pace as semis this quarter, but it will have higher-growth outliers, mostly in the cloud computing area. On average, software companies will see blended revenue growth of about 16%, with cloud companies leading the way.
ServiceNow Inc.

and payroll provider Paycom Software Inc.

are all expected to surpass the revenue growth rate of Microsoft Corp.
which is expected to see overall revenue of $44 billion, up 16%, while its Azure cloud business grows at around 45%.

Dan Ives, a Wedbush Securities analyst, believes Microsoft could surpass the revenue expectations of $44 billion, though, thanks to hefty growth in Azure.

“We are expecting another robust Giannis-like cloud performance by Microsoft,” Ives said in a recent note, referring to Giannis Antetokounmpo, the star forward for the Milwaukee Bucks who won NBA Finals MVP earlier this month. Ives said Microsoft’s cloud deals are increasing in size, as more large corporations accelerate their enterprise-wide shift to a cloud driven architecture. 

But many of the companies who are still seeing strong results will face tough questions. After Snap Inc.

and Twitter Inc.

reported booming ad sales last week, investors are counting on strong results for other companies in the digital advertising arena. But the antitrust lawsuits and potential regulatory crackdowns still loom large and a big change made by Apple are still worrisome.

See also: Facebook earnings preview and Alphabet earnings preview

The identifier for advertisers, or IDFA, has resulted in a feud between Facebook and Apple. So far, Wall Street is not too worried about any slowdown in ad revenue at Facebook or other social media companies as a result of IDFA, a random identifier assigned to a device by Apple that inhibits the ability of the big social media giants to track their users and offer them specific, targeted ads, but maybe they should be.

More from Therese: Apple’s privacy changes are affecting more than just Facebook

“All eyes are on IDFA,” said Beth Kindig, an independent technology investment analyst. “I think that’s why you are seeing some weakness in ad tech. “Facebook, Snap, Pinterest have all talked about it on their calls, this is the moment.”

FactSet classifies Facebook, Google’s parent Alphabet, and Twitter under interactive media services, which is forecast to see average revenue growth of 48%, while Twitter posted better than expected results earlier this week. Analysts are not worried about results at Facebook, despite the company’s constant warnings of potential impact from various and sundry issues, including IDFA. Both Alphabet and Facebook are forecast to see approximately 48% revenue growth.

The forecasts from company execs and color on the conference calls should provide signals for investors on how long this growth could last. But as everyone has already learned from the pandemic, change can happen rapidly and is beyond our control.

Roy Walsh

Roy Walsh

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