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All Eyes on Big Tech Earnings: Here's What to Expect

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The coronavirus pandemic might have slammed the broader market in the June quarter but tech isn’t expected to have seen much effect on earnings.
 
For the sector, second-quarter earnings are expected to be down 10.9% on 0.3% lower revenues. But that’s far better compared to the overall earnings picture. This is because total earnings for S&P 500 companies are projected to decline 42.9% on 9.6% lower revenues (read more: The Technology Sector Shows its Earnings Power Amid Coronavirus).
 
Thus, investors are now keeping an eye on four big tech companies in terms of market capitalization that are slated to report their June-quarter earnings on Jul 30, after the closing bell. Apple Inc. (AAPL - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Alphabet Inc. (GOOGL - Free Report) and Facebook, Inc. (FB - Free Report) – worth nearly $5 trillion – are mostly expected to come up with encouraging earnings results.
 
The big four are expected to have benefitted from the coronavirus-led shutdown measures as some of their businesses gained immensely from consumers, mostly working and learning from home. At the same time, these companies have been gaining immensely from secular trends like cloud computing and robust telecommunications infrastructure — demand for which skyrocketed amid the health crisis.
 
The big four tech stocks along with Microsoft Corporation (MSFT - Free Report) have in fact returned 49% over the past year, whereas the rest of the companies in the S&P 500 cohort have barely moved. Jonathan Golub, chief U.S. equity strategist at Credit Suisse, noted that net margins of the big four and Microsoft taken together are 17.3% on average in the trailing 12 months, which is 70% higher than the rest of the S&P 500 companies. And profits of the five stocks were up 3.1% in the same period against a 9.2% decline for the other S&P 500 companies.
 
But if financial results for the to-be-reported quarter fall short of expectations, it could cause big market gyrations in after-hour trading and again on Jul 31. After all, their sheer size no doubt will have a big impact on the market and could easily decide whether the bourses will continue to hit new highs. Nevertheless, Golub has calmed investors’ concerns by saying that these companies have strong cash positions and their higher margins should certainly help them post better results in periods of market stress. Let us, thus, take a look at how they will fare this time around –

Apple – Strong Growth Expected in Services Segment

One of the areas of Apple’s business that investors expect to have shone in the June quarter is the services segment. It has always been Apple’s most lucrative segment in terms of gross profit, and investors anticipate lockdown measures and social-distancing norms in the quarter to have fuelled rapid growth in the segment that includes the App Store and Apple Pay.
 
But Apple’s fortunes are heavily dependent on iPhone sales. And the company’s fiscal third-quarter iPhone sales are believed to have remained muted due to sluggish demand in China. Thus, Apple’s sales are expected at $51.94 billion, indicating a year-over-year decline of 3.5%. Earnings per share are also likely to come in at $2.03, suggesting a 6.9% decline year over year. Traditionally, Apple’s third-quarter fiscal results are always the weakest. The Zacks Rank #3 (Hold) company currently has an Earnings ESP of +0.72%. Per our proven model, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 increases the chances of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

Amazon – Big Expectations From Online Sales

With majority of retail stores remaining closed in the June quarter, online sales picked up lockdown and social-distancing measures. What’s more, financial relief packages by the government and an uptick in employment rates increased disposable income in the quarter, something that boosted online sales.
 
Separately, Amazon’s focus on cloud computing might have improved the e-commerce giant’s financial results. This is because as majority of people remotely worked during the quarter ending June 2020, most companies had to move a bulk portion of their workloads to the cloud. The Zacks Rank #3 company currently has an Earnings ESP of +107.82%.

Social Media Platform a Boon for Facebook

The pandemic helped Facebook increase user engagement with its several social media platforms as people had to stay at home amid stringent lockdown measures imposed to curtail the spread of the deadly virus.
 
Therefore, Facebook is widely expected to have seen a surge in the usage of its services like Messenger, Instagram and WhatsApp in the second quarter.
 
Thus, the company’s expected revenues for the June quarter is $17.29 billion, indicating a year-over-year increase of 2.4%. Similarly, the company expects earnings per share of $1.44, indicating a 58.2% increase from the same period last year. What’s more, the Zacks Rank #3 company has an Earnings ESP of +4.86%.

Alphabet – Is YouTube and Cloud Services the Saving Grace?

The numbers weren’t encouraging for Alphabet in the first quarter. But three months later, Alphabet’s shares went up nearly 21%. So, what happened? This is because the stay-at-home economy in the second quarter buoyed Alphabet’s YouTube and Cloud services that provided home-based access to the outside world.
 
However, Alphabet had to bear significant costs in providing cloud services. Needless to say, rising litigations across the world due to its dominant position in search also remained a headwind in the June quarter. As a result, the Zacks Rank #3 company currently has an Earnings ESP of -1.12%.

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