The second-quarter reporting cycle has begun with 97 S&P 500 members, representing 28.1% of the index’s total market capitalization, having already reported their results.
Per the latest Earnings Preview, total earnings of these companies are up 8.4% on a year-over-year basis (78.4% of the companies beat EPS estimates) while total revenue is up 5.1% on a year-over-year basis (almost 72.2% of the companies also beat top-line estimates).
Earnings Expectations Soaring High
More than 800 companies are set to report results this week (Jul 24-28), including 183 S&P 500 members. Total second-quarter earnings are now expected to increase 8.6% (up from the previous expectation of 6.6%) from the year-ago quarter on revenue growth of 4.7%.
Actual second-quarter earnings growth could very well be above 10% compared with 13.3% earnings growth in the preceding quarter.
Moreover, unlike the previous quarters, growth is broad-based and not dependent on one or two sectors. Contribution from Finance, Technology and Energy sectors is significant.
We note that the technology sector has been performing magnificently on a year-to-date basis with innovation taking center stage. The sector is benefiting from increasing demand for cloud-based platforms, growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, and Internet of Things (IoT) related software.
Internet stocks, which generate revenues from web-based technology and e-commerce, are witnessing a boom owing to an increase in web-based activities.
Notably, PowerShares NASDAQ Internet Portfolio ETF, one of the most-tracked internet stock ETF, has gained 34% on a year-to-date basis, which is significantly better than the S&P 500’s gain of 12.1% and Technology Select Sector SPDR ETF’s (XLK) return of 19.8%.
Here we take a look at three software companies that are set to report their second-quarter earnings on Jul 25:
Akamai (AKAM - Free Report) is unlikely to beat expectations as it has an unfavorable combination of a Zacks Rank #4 (Sell) and an Earnings ESP of +2.27%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
This is because, as per our proven model, a company needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.
We caution against stocks with a Zacks Rank #4 (Sell) or 5 going into an earnings announcement, especially when the company is seeing negative estimate revisions.
However, we note that Akamai beat the Zacks Consensus Estimate in three of the trailing four quarters, delivering in an average positive surprise of 1.49%.
We believe that Akamai’s strong foothold in the web applications domain will be a key catalyst for the company’s growth. However headwinds related to do-it-yourself (DIY) initiatives by large internet companies (Amazon, Apple, Facebook, Google, Microsoft, and Netflix) are a concern. (Read: Akamai’s Q2 Earnings: Is Disappointment in Store?)
Akamai has underperformed the S&P 500 on a year-to-date basis. While the index gained 12.1%, the stock lost 21.8% over the same time frame.
Similarly, Chegg Inc. (CHGG - Free Report) is unlikely to beat estimates as it has an unfavorable combination of an Earnings ESP of 0.00% and a Zacks Rank #3. Notably, the company has beaten the Zacks Consensus Estimate in each of the preceding four quarters. It delivered an average four-quarter positive surprise of 46.16%.
We believe Chegg’s strategy of delivering high quality and low cost educational products and services coupled with the increasing popularity of online, on-demand human help for different courses at college and high school levels bode well for the company. (Read: Can Chegg Spring a Surprise this Earnings Season?)
Notably, shares have gained 88.1% on a year-to-date basis compared with the industry’s rise of 19.9%.
Shutterfly Inc. (SFLY - Free Report) also does not look likely to beat estimates as it has an unfavorable combination of a Zacks Rank #3 and an Earnings ESP of 0.00%.
We believe Shutterfly’s improved offerings in the growing mobile e-commerce segment, aggressive promotions and easy-to-use products are key growth drivers. Its recently announced restructuring will also have a positive impact on the cost structure. However, unfavorable travel industry and consumer spending trends might limit revenue growth. (Read: What to Expect from Shutterfly this Earnings Season?)
Notably, Shutterfly has beaten the Zacks Consensus Estimate in three of the four preceding quarters with an average positive surprise of 13.12%. However, the company has underperformed the industry on a year-to-date basis. While the industry gained 37.2%, the stock lost 5.2%.
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