The second-quarter earnings season is now more than 70% over with 350 having already reported. According to the latest Earnings Trends, total earnings for these companies are up +11% on a year-over-year basis on +5.9% higher revenues. Growth has been broad based with strong contributions from Technology, Finance and Energy.
AI, IoT, Cybersecurity Key Catalysts
We note that Technology sector has been a prolific performer on a year-to-date basis in 2017. The Technology Select Sector SPDR ETF (XLK) has gained 18.9% as compared with S&P 500’s gain of 10.8% on a year-to-date basis.
The sector is benefiting from increasing demand for cloud-based platforms, growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, autonomous cars, advanced driver assisted systems (ADAS) and Internet of Things (IoT) related software.
Rapidly expanding IoT market is driving growth for chip components to power applications particularly ADAS, medical/healthcare and smart devices. This bodes well for semiconductor stocks.
We note that second-quarter earnings for semiconductor stocks are up 63.4% (as of Aug 2), the highest growth in the technology sector. The robust performance reflects strong demand for power-efficient as well as high performance chips that are essential to run cloud-data centers and process massive data by using IoT analytics, machine learning and deep learning applications.
Moreover, rapid development of 5G platform and technology has evolved as the next catalyst for the semiconductor providers.
Earnings Expectations Rising
The technology space continues to be investors’ favorite owing to its dynamic nature. Increasing high-tech industrial production in the U.S., solid underlying fundamentals and impressive growth opportunities have been primarily responsible for the sectors’ earnings momentum, which is expected to persist in the rest of 2017.
Launch of new server processors from both Intel (INTC) and Advanced Micro Devices (AMD) is expected to drive a server refresh cycle. This will definitely boost second-half results.
Moreover, AMD recently launched its premium desktop processor family – Threadripper – as well as high end Vega gaming graphics chips. Most recently, the company released Ryzen 3 processor. It is set to release notebook Ryzen chips late 2017. Intel is expected to response by launching 14-nm eighth generation core processors (Coffee Lake).
We believe that this new launches along with growing adoption of Windows 10 can give a boost to the sluggish PC shipment market. Moreover, DRAM and NAND supply constraints are also expected to ease out in the later half.
Further, growing incidents of cyber attack are also anticipated to increase the demand for cybersecurity software providers.
Technology sector’s second-quarter earnings are now expected to grow 15% from the same period last year on 6.9% higher revenues. Initial earnings estimates for the third quarter are now pegged at 8.7% on revenues of 5.6%.
How to Make the Right Pick?
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Given below are three technology providers that have the right combination of elements to post an earnings beat this quarter:
Broadcom Limited (AVGO - Free Report) – The company is a premier designer, developer and global supplier of a broad range of semiconductor devices. The company was formed following the completion of the merger of Avago and Broadcom Corporation on Feb 1, 2016. Headquarters are located in Yishun, Singapore and San Jose, CA.
We note that Broadcom has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 6.73%.
This Zacks Rank #2 stock has an Earnings ESP of +2.57%. The company is anticipated to report third-quarter 2017 results on Aug 24. You can see the complete list of today’s Zacks #1 Rank stocks here.
CACI International (CACI - Free Report) – Based in Arlington, VA, CACI International delivers IT applications and infrastructure to improve communications and secure the integrity of information systems and networks, enhance data collection and analysis, along with increasing efficiency and mission effectiveness.
We note that the company has beaten the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 31.64%.
The company is set to report fourth-quarter 2017 results on Aug 16. Currently, CACI has an Earnings ESP of +1.83% and carries a Zacks Rank #2.
Airgain Inc. (AIRG - Free Report) – San Diego, CA-based company is a leading provider of embedded antenna products for original equipment and design manufacturers, chipset vendors, and service providers worldwide.
Notably, the company has beaten the Zacks Consensus Estimate in the preceding three quarters, with an average positive earnings surprise of 677.78%.
This Zacks Rank #3 stock has an Earnings ESP of +50%. The company is expected to report second-quarter 2017 results on Aug 7.
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