The third-quarter earnings season is in full swing, with more than 900 companies set to report their quarterly numbers this week. Out of these companies, market participants’ focus will be predominantly on the technology behemoths.
The third-quarter earnings results are pretty encouraging so far. This is in contrast to the view of a section of economists and financial experts that the momentum of the U.S. economic recovery slipped last quarter owing to prolonged supply-chain disruptions, labor shortage, higher inflationary pressure and the resurgence of the Delta variant of the novel coronavirus.
In fact, it is primarily the robust third-quarter earnings results that led Wall Street to a bull ride in October after a tumultuous September. Nevertheless, earnings results of the tech sector, especially, the technology giants, will set the course for U.S. stock markets in the near term.
Technology Sector in Q3 At a Glance
The technology sector faced two major macro-economic headwinds in last quarter. The lingering global supply-chain disruptions led by the acute shortage of chipset affected the overall technology sector. Moreover, the lack of skilled labor resulted in a higher wage rate. These two factors together raised input costs for the industry players.
Second, inflation rates skyrocketed in the third quarter compelling the Fed to think about tapering ithe existing quantitative easing program that the central bank adopted to maintain sufficient liquidity in the economy during the pandemic era.
The anticipation of the Fed’s tapering of $120 billion per month bond-buy program resulted in a spike in the yield curve of government bonds. Higher market risk-free returns are detrimental to growth-oriented sectors, especially, technology stocks. A higher discount rate will reduce the net present value of investment in technology stocks.
Despite these hindrances, the Technology Select Sector SPDR (XLK), one of the 11broad sectors of the market’s benchmark — the S&P 500 Index — gained 1.3% in the third-quarter.
Stocks in Focus
Five technology bigwigs (market capital > $100 billion) are slated to release earnings results this week. Each of these stocks carries either a Zacks Rank#2 (Buy) or 3 (Hold) and has a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are anticipated to appreciate after earnings releases. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The chart below shows the price performance of five stocks mentioned below in the last quarter.
Image Source: Zacks Investment Research
Advanced Micro Devices Inc. AMD is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. It is benefiting from strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud gaming and the supercomputing domain.
Moreover, the growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst. Management raised its 2021 guidance for revenues and gross margin on the back of strong growth across all businesses.
This Zacks Rank #2 company has an Earnings ESP of +2.31%. It has an expected earnings growth rate of 94.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 14.9%. The company is set to release third-quarter 2021 earnings results on Oct 26, after the closing bell.
Alphabet Inc. GOOGL has been showing increased appetite in the Home Assistant space. The company is focused on innovation, launching products and services for multiple industries. Alphabet’s robust cloud division is aiding substantial revenue growth.
Moreover, expanding data centers will continue to bolster its presence in the cloud space. Further, major updates in its search segment are enhancing the search results. Additionally, Google’s mobile search is gaining solid momentum. Further, strong focus on innovation of AI techniques and the home automation space should aid business growth in the long term. Also, its deepening focus on the wearables category remains a tailwind.
This Zacks Rank #2 company has an Earnings ESP of +7.71%. It has an expected earnings growth rate of 73.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.01% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 47.2%. The company is set to release third-quarter 2021 earnings results on Oct 26, after the closing bell.2
Texas Instruments Inc. TXN is benefiting from growth in the personal electronics market owing to the coronavirus-led work-from-home trend. Additionally, solid momentum across the Analog segment owing to robust signal chain and power product lines, is benefiting the top line.
The continued rebound in the automotive market is a tailwind for the company. Solid growth in the industrial market is another positive. Strategic investments in new growth avenues and competitive advantages should also reap results in the long term. Its portfolio of long-lived products and efficient manufacturing strategies are the other catalysts.
This Zacks Rank #2 company has an Earnings ESP of +9.22%. It has an expected earnings growth rate of 32.7% for the current year. The Zacks Consensus Estimate for current year-earnings improved 0.8% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 20.3%. The company is set to release third-quarter 2021 earnings results on Oct 26, after the closing bell.
ServiceNow Inc. NOW is benefiting from robust growth in subscription revenues driven by the digital transformation of enterprises. As enterprises continue to cloudify their infrastructure, the company is poised to boost uptake of its Now platform. Its workflow solutions have been winning customers on a regular basis.
Further, ServiceNow’s expanding global presence, a solid partner base and strategic buyouts are expected to bolster growth prospects. Based on the strong adoption of its digital workflow solutions, ServiceNow expects 2021 subscription billings to grow year over year. Also, strategic alliances with various technology behemoths remain tailwinds.
This Zacks Rank #3 company has an Earnings ESP of +4.32%. It has an expected earnings growth rate of 25.5% for the current year. The Zacks Consensus Estimate for current year-earnings improved 0.2% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 14.9%. The company is set to release third-quarter 2021 earnings results on Oct 27, after the closing bell.
Apple Inc. AAPL is benefiting from continued momentum in the Services segment, driven by App Store, Cloud Services, Music, advertising and AppleCare. The company’s near-term prospects are bright, driven by new iPhones that support 5G, revamped iPad and Mac line-up of devices, healthcare-focused Apple Watch, and an expanding App Store ecosystem.
Apple’s ability to attract small developers has been a key catalyst. Moreover, its devices continue to gain traction among enterprises. Its focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities in the long haul. These are fast emerging as lucrative business opportunities.
This Zacks Rank #3 company has an Earnings ESP of +5.69%. It has an expected earnings growth rate of 2.5% for the current year (ending September 2022). It recorded earnings surprises in the last four reported quarters, with an average beat of 23.7%. The company is set to release fourth-quarter fiscal 2021 earnings results on Oct 28, after the closing bell.
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