The second-quarter 2016 earnings season is picking up steam, and Technology is likely to be in the limelight with the major Internet, finance and software companies scheduled to report their earnings results this week. This should add momentum to the market.
As per the latest Zacks Earnings Trend
report, total earnings in the tech sector are expected to be down 6.2% on 2.7% higher revenues, which would follow the sector’s 4.5% earnings decline on 0.4% higher revenues in Q1. Excluding Apple, the Tech sector’s Q2 earnings would be down only 0.6%, impacted by global growth concerns, a strengthening dollar and volatility. Further, the Brexit fallout adds to our concerns.
Fortunately for Internet companies, 2016 hasn’t been too bad. This segment covers all activities that take place on the Internet, including auctions, order placements, payments, fund transfers, and collaborating with trading partners. Standing at the cusp of a possible Internet revolution, we believe this sector has a lot to offer this quarter.
Factors Driving Internet Sales
The biggest factor driving sales here is worldwide growth in consumer spending online. According to a market research firm eMarketer, online purchases will more than double to $3.551 trillion, or 12.4% of total retail sales of $28.550 trillion, as more people come online around the world.
Another factor driving Internet sales is the surge in the adoption of smartphones, tablets and other mobile devices. China, the U.S. and India will remain the biggest smartphone markets up to 2018, according to eMarketer. Russia will take the fourth position this year and India will move to the second slot next year, according to the same study.
Continued advancement in technology is improving navigation and customer experience on e-Commerce sites, in turn increasing reviews and drawing traffic. For instance, beacon technology that enables retailers to track customers in stores and push promos and offers is expected to assume great importance in this year’s holiday season. New payment technologies such as near field communication (NFC), quick response (QR) code, Soundwave and Bluetooth low energy (BLE) are facilitating the process. Additionally, with TVs and game consoles increasingly becoming connected to the Internet, digital versions of books, music, video and games are flooding the market. Since the shift in consumption patterns had led to multi-functional electronic gadgets/wearables, there is a huge drive to develop technologies to improve the quality of each experience.
Consequently, Forrester expects U.S. companies to nearly double their spending on Internet commerce technology before the end of this decade. The research firm expects Internet commerce spending to grow from $1.2 billion in 2015 to $2.1 billion in 2019, at a compound annual growth rate (CAGR) of 12% and representing overall growth of 75%.
How Earnings ESP Helps Choose Winners
The Earnings ESP
uses Zacks proprietary methodology for determining the Most Accurate Estimate, and then compares that to the Zacks Consensus Estimate. The percentage difference between the two is the 'expected' surprise that Zacks is predicting the company will report come earnings time.
This Earnings ESP system works best when combined with the Zacks Rank.
Very simply, stocks with a Zacks Rank of a #1, #2, or #3 (Strong Buy, Buy, or Hold), with a positive Earnings ESP, are the ones that produce a positive surprise 70% of the time. This is an important combination.
If a stock has a positive Earnings ESP, but a Zacks Rank of a #4 or #5 (Sell, or Strong Sell), the chance of a positive surprise is diminished and the likelihood of a negative surprise increases.
Likewise, if a stock has a Zacks Rank of a #1, #2, or #3, but has a negative Earnings ESP, the chance of obtaining a positive surprise falls to little better than a coin flip at 52%.
How to Identify the Outperformers?
Picking the best stocks from the Internet space is a fairly simple task. One way to go about it, especially during the earnings season, is by selecting stocks that have a combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.
We have highlighted five Internet stocks with the desired combination that are likely to stand out this earnings season:
5 Prominent Picks
(IAC - Free Report
) , an Internet company, carries a Zacks Rank #3 and has an Earnings ESP of +25.71%. IAC/InterActiveCorp outperformed the Zacks Consensus Estimate in two out of the trailing four quarters, with an average positive surprise of 1.88%.The current Zacks Consensus Estimate for 2016 is $2.48 a share, which indicates an increase of 7.36% year over year. It has a long-term earnings growth rate of 16.10%. The company’s second-quarter earnings are expected to be released on Jul 27.
(AMZN - Free Report
) carrying a Zacks Rank #2 has an Earnings ESP of +37.72%. This e-commerce giant outperformed the Zacks Consensus Estimate in three out of the trailing four quarters, with an average positive surprise of 133.55%. Amazon has a long-term earnings growth rate of 43.2%. The company’s second-quarter earnings are expected to be released on Jul 28.
Amazon’s strong fundamentals, platform strategy, various growth initiatives including cloud infrastructure service, AWS and IoT make it an attractive stock, in our view.
(EXPE - Free Report
) carrying a Zacks Rank #3 has an Earnings ESP of +17.07%. The current Zacks Consensus Estimate for 2016 is $4.02 cents a share, which indicates an increase of 41.4% year over year. This online travel research company has a long-term earnings growth rate of 23.9%. The company’s second-quarter earnings are expected to be released on Jul 28.
Expedia’s solid financial position, increasing market share, focus on developing its mobile products and improvement in user growth and engagement, especially mobile devices, make it an attractive stock, in our view.
, also a Zacks Rank #3 stock, has an Earnings ESP of +3.85%. This provider of authentication and access management solutions for the healthcare industry outperformed the Zacks Consensus Estimate in each of the last four quarters, with an average positive surprise of 22.88%. The company has a long-term earnings growth rate of 21.0%. Imprivata is scheduled to release financial numbers on Aug 3.
Demand Media, Inc.
operates as a media company offering two distinct but complementary services: Content & Media and Registrar. The company carries a Zacks Rank #3 and has an Earnings ESP of +18.61%. It has outperformed the Zacks Consensus Estimate in three out of the trailing four quarters, with an average positive surprise of 14.61%. The company is expected to report second-quarter results on Aug 4.
Like always, some stocks will skyrocket after earnings are announced while others will fall off the cliff. Employing the Zacks ESP methodology will help you to track down the likely outperformers before they report.
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