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Microsoft had to issue a guidance warning last week as the company gauged potential supply chain hiccups stemming from the coronavirus outbreak in China, a week after Apple made a similar move.
Microsoft became the latest mega-cap technology company to warn that the coronavirus will negatively impact its current-quarter results. In a press release, the company said that the $10.75 - $11.15 billion revenue guidance for its More Personal Computing (MPC) segment (provided on January 29) -- which was a wider-than-normal range to provide for the virus impact -- would come in lower.
“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
In the December quarter reported on Jan 29, the MPC wing accounted for 35.8% of the company's total revenue. This segment also includes the Xbox video gaming products and services and internet search advertising.
PC Devices To Take a Hit
Wedbush analyst Dan Ives said on Thursday, “It fans the flames on coronavirus worries,” and “Apple and Microsoft now confirm the negative impact the Street had feared.” Other than the immediate impact on sales, there are inventory and other issues throughout the electronics supply chain that will impact a broad spectrum of companies in the sector.
Already some research firms have started cutting their outlooks for certain industries. Supply chain analytics firm Trendforce said that labor shortages and travel restrictions in China would have an impact on electronics/consumer items like smartphones, smartwatches and computer panels.
David Wong of Instinet LLC agrees: “We think there may be risk to demand in most electronic end markets, though we believe the end markets associated with consumer purchases might have the most potential downside. We remain cautious on the chip industry overall and selective in our chip and chip-equipment stock picks.” Moreover, he expects the impact to be prolonged: “We think that many investors, and companies, may have underestimated the risk of the current issues impacting electronics end market demand through 2020.”
On February 27, International Data Corporation (IDC) lowered its forecast for personal computing devices (PCDs), inclusive of desktops, notebooks, workstations, and tablets: "According to new projections from the Worldwide Quarterly Personal Computing Device Tracker, overall PCD shipments will decline 9.0% in 2020 reaching 374.2 million by year's end."
The IDC forecast was attributed not just to the spread of COVID-19 "hampering supply and leading to reduced demand," but also their estimates for the Windows 7 to Windows 10 transition creating tougher year-over-year growth comparisons.
The Case for Buying MSFT Up to 28X EPS
Given all this bad news, MSFT shares getting back to pre-December quarter levels in the $150s made the stock very attractive. On Friday, I found the panicky sell-off in big Tech so appealing that I bought the ProShares 3X Bull leveraged ETF on the Nasdaq 100 just to quickly "grab a seat" on the deeply over-sold bull train.
And on Monday morning, I chose MSFT for our weekly Top Stock Picks video for an unbeatable combination of attributes...
1. "Port in a storm" safety and stability as enterprise tech dominator
2. Reliable sales and earnings growth of 10-15% each
3. Growth of innovative new platforms like Teams for remote work
Regarding the impact of China supply chain issues, the company hadn't planned to release the new Surface Duo for the Android OS until later this year. And while there is chatter they might do it earlier because this version would only be 4G compatible, investors don't seem too worried because they see the long-term trajectory of the MPC unit.
Jefferies analyst Brent Thill, in a 2/27 research note titled "No Immunity Even for the Elite," wrote "We're adjusting our estimates after MSFT announced that it would not achieve its guidance for its More Personal Computing segment this quarter due to the ongoing impacts of the Covid-19 health emergency. The revised expectations were solely due to lowered Surface and Windows OEM expectations and there were no other changes to guidance. We view this as a temporary issue and not indicative of the demand for MSFT products." Thill maintained his $195 price target on MSFT while trimming EPS slightly for the first half.
And on March 1, Dan Ives -- who I just had as a guest on the Mind Over Money podcast last month -- wrote this to investors...
Does coronavirus negatively impact the supply chain, cause massive demand uncertainty in the near-term around consumers/enterprises, and ultimately add a major risk profile to valuations and tech stock multiples that has just been rapidly factored into the market over the last week? The answer is a clear YES. However, does coronavirus massively disrupt/erase the long-term transformational bullish trends of cloud computing, 5G, EV, streaming, and cyber security for the next few years? The answer in our opinion is a resounding NO.
To hear Dan opine on this "unprecedented tech bull market driven by themes such as the enterprise move to cloud computing, a transformational 5G super cycle, EV auto demand inflection, streaming cord cutting paradigm shift, and cyber security all representing some of the major game changing trends poised to change the consumer and enterprise landscape for the next decade," check out our interview here...
Investors who missed the great rallies to new highs in Apple and Microsoft this year have been wondering why, and wishing they listened to Dan Ives all last year. And these gems remain among his top stocks to accumulate during this correction. Tesla is near the top of his shopping list too.
Big Data Will Boost Cloud Revenues Over $40 Billion
Finally, it's worth noting that Microsoft's primary growth driver won't be impacted by global slowdown worries, with Intelligent Cloud (IC) growing at over 20% last year and likely to repeat in 2020. Here's what my colleague Dan Laboe wrote in his profile two weeks ago...
Microsoft has become the largest publicly traded company in the US because of its best-in-class management team that has been able to stay ahead of the competitive curve for decades. Microsoft was the largest company by market cap at the turn of the millennium, and 20 years later, this enterprise has taken the helm once again.
This software giant has been a role model for tech start-ups around the world. Microsoft has controlled the computer OS market for decades and is now taking control of the cloud computing market. The effective transition from on-premise software to cloud-based systems has brought this legacy firm back to its place at the top.
Microsoft’s new subscription-based revenue drivers, whether it’s Microsoft Office or one of its many cloud services its offer, has allowed this enterprise to grow out its sales by reliable double-digit percentages YoY. Microsoft offers customers Infrastructure-as-a-Service (IaaS) through its platform, Azure, competing in this very lucrative but quickly saturating business with tech giants like Amazon and Alphabet.
The $50 billion IaaS industry is proliferating, and more businesses see the benefit of outsourcing their tech infrastructure. Amazon’s AWS has controlled the space as an early mover on cloud computing, but Azure is slowly but surely taking market share. Azure is in an early stage of development compared to AWS, but it is being offered at a fraction of the price, growing at double the rate, and analysts are calling it best-in-class.
(end of Dan Laboe's commentary)
Bottom line: In Microsoft's leading position in these technologies, large investors will continue to find safe harbor in its steady growth. And in a strong bull market, Microsoft shares will very likely ascend over 30X this year's projected $6 EPS.
Shopify is the $55 billion upstart taking on Amazon and Ebay in the small business etailer platform market.
And earnings estimates just plunged after the company revealed a big investment year ahead in their Q4 report delivered on February 12.
Since that reveal, the Zacks consensus for full-year 2020 EPS dropped over 75% from $0.89 to $0.21. Next year got clobbered 55% from $1.60 to just $0.72.
Analysts also found themselves having to adjust their ratings as well since the hyper-growth platform trades at 25 times sales.
Shopify was downgraded to Neutral from Outperform at Credit Suisse with analyst Brad Zelnick saying that despite another strong quarter from Shopify -- and his positive fundamental view on the company's long-term opportunity and belief in management's strategy and ability to execute -- he cut the shares on its "lofty valuation and embedded expectations."
Yet, price targets were raised dramatically across the board in February after the company call, and that's why shares soared from $500 to nearly $600 on Feb 12...
SunTrust: Hold $340 to $585
Baird: Outperform $465 to $590
Wedbush: Neutral $325 to $475
Wells Fargo: Overweight $400 to $600
KeyCorp: Overweight $485 to $575
Rosenblatt: Buy $481 to $630
UBS Group: Underperform $450
Credit Suisse: Neutral $450 to $575
Raymond James: Outperform $365 to $600
Canaccord Genuity: Buy $385 to $600
Royal Bank of Canada: Outperform $400 to $650
Investors wanting to get into Shopify (myself included) probably thought we were going to get our chance in the recent correction.
I wanted to get in on the Jan 9 gap fill near $420 but I was too slow on Friday.
Now I'll have to wait until SHOP is out of the Zacks Rank cellar.
Additional content:
I’m Not Selling… Because Robinhood Won’t Let Me
The markets are bouncing today following the biggest one-week drop off since the financial crisis in 2008. The Dow Jones Industrial plummeted over 3500 points last week, representing the largest one-week point drop in the history of the index. Today the markets are beginning to recover, and investors are buying the dip. At the height of trading excitement, millennials’ favorite trading platform, Robinhood, is suffering a system-wide outage.
The over 10 million users on Robinhood’s free-trading platform have seen their current holdings frozen with no way to buy or sell any asset. I purchased Microsoft calls on Friday through Robinhood’s mobile applications, which I planned on selling today (Monday, March 2nd) for a quick turnaround but am unable to get out of my positions. This is a horrible sign for the mobile trading start-up. Robinhood is best known for its industry-disrupting offering of commission-free trading.
The markets are hitting record high volumes today, and Robinhood’s server infrastructure is not developed enough to handle its 10+ million users. Highly volatile markets with massive volume have never tested the company, and the fact that it has frozen everyone’s assets during the market biggest one day rally of the year is not only beyond frustrating but a massive red flag. This inability to service customers when they need it the most makes me question the firm’s ability to be recognized as a legitimate trading platform.
Robinhood’s platform demonstrated a flaw last fall when individuals were able to gain “infinite leverage” through a loophole that the company has since fixed. This shows the firm’s platform is still at an earlier stage in development than its competitors and has bugs.
Robinhood has lost the faith of many of its users, and the platform will undoubtedly lose a significant number of investors if they do not appropriately handle this shutdown. The platform’s nonexistent liquidity today is going to cost the company a lot. If Robinhood doesn’t have the cash to compensate those that lost money from this freeze appropriately, they risk not only losing clients but potential lawsuits.
Millennial investors are going to turn to more mature trading platforms that can handle any level of traffic like Charles Schwab and TD Ameritrade, which recently announced a $26 billion merger. E-Trade also stands to gain, with Morgan Stanley, who just announced it would be buying the company for $13 billion.
The consolidation of these “more legitimate” online brokerages will allow the companies to leverage competitive scale advantages that Robinhood’s young platform is unable to do. There have been discussions of the business taking its shares public. This outage will likely put this pending IPO on hold.
Take Away
The system-wide outage on one of the highest volume trading days could mark the end of Robinhood if it is not corrected and investors aren’t made whole. Robinhood’s 10+ clients represents a massive potential market for competing trading platforms if these investors decide their money would be safer with one of the more mature brokerages.
As of 2 pm Eastern Standard time, the platform is still down, and there is no news or timeline about when to expect it back up.
Today's Best Stocks from Zacks
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This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year. See their latest picks free >>
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Microsoft, Shopify, Charles Schwab, E-Trade and Morgan Stanley highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – March 3, 2020 – Zacks Equity Research Shares of Microsoft (MSFT - Free Report) as the Bull of the Day, Shopify (SHOP - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Charles Schwab (SCHW - Free Report) , E-Trade and Morgan Stanley (MS - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Microsoft had to issue a guidance warning last week as the company gauged potential supply chain hiccups stemming from the coronavirus outbreak in China, a week after Apple made a similar move.
Microsoft became the latest mega-cap technology company to warn that the coronavirus will negatively impact its current-quarter results. In a press release, the company said that the $10.75 - $11.15 billion revenue guidance for its More Personal Computing (MPC) segment (provided on January 29) -- which was a wider-than-normal range to provide for the virus impact -- would come in lower.
“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
In the December quarter reported on Jan 29, the MPC wing accounted for 35.8% of the company's total revenue. This segment also includes the Xbox video gaming products and services and internet search advertising.
PC Devices To Take a Hit
Wedbush analyst Dan Ives said on Thursday, “It fans the flames on coronavirus worries,” and “Apple and Microsoft now confirm the negative impact the Street had feared.” Other than the immediate impact on sales, there are inventory and other issues throughout the electronics supply chain that will impact a broad spectrum of companies in the sector.
Already some research firms have started cutting their outlooks for certain industries. Supply chain analytics firm Trendforce said that labor shortages and travel restrictions in China would have an impact on electronics/consumer items like smartphones, smartwatches and computer panels.
David Wong of Instinet LLC agrees: “We think there may be risk to demand in most electronic end markets, though we believe the end markets associated with consumer purchases might have the most potential downside. We remain cautious on the chip industry overall and selective in our chip and chip-equipment stock picks.” Moreover, he expects the impact to be prolonged: “We think that many investors, and companies, may have underestimated the risk of the current issues impacting electronics end market demand through 2020.”
On February 27, International Data Corporation (IDC) lowered its forecast for personal computing devices (PCDs), inclusive of desktops, notebooks, workstations, and tablets: "According to new projections from the Worldwide Quarterly Personal Computing Device Tracker, overall PCD shipments will decline 9.0% in 2020 reaching 374.2 million by year's end."
The IDC forecast was attributed not just to the spread of COVID-19 "hampering supply and leading to reduced demand," but also their estimates for the Windows 7 to Windows 10 transition creating tougher year-over-year growth comparisons.
The Case for Buying MSFT Up to 28X EPS
Given all this bad news, MSFT shares getting back to pre-December quarter levels in the $150s made the stock very attractive. On Friday, I found the panicky sell-off in big Tech so appealing that I bought the ProShares 3X Bull leveraged ETF on the Nasdaq 100 just to quickly "grab a seat" on the deeply over-sold bull train.
And on Monday morning, I chose MSFT for our weekly Top Stock Picks video for an unbeatable combination of attributes...
1. "Port in a storm" safety and stability as enterprise tech dominator
2. Reliable sales and earnings growth of 10-15% each
3. Growth of innovative new platforms like Teams for remote work
Regarding the impact of China supply chain issues, the company hadn't planned to release the new Surface Duo for the Android OS until later this year. And while there is chatter they might do it earlier because this version would only be 4G compatible, investors don't seem too worried because they see the long-term trajectory of the MPC unit.
Jefferies analyst Brent Thill, in a 2/27 research note titled "No Immunity Even for the Elite," wrote "We're adjusting our estimates after MSFT announced that it would not achieve its guidance for its More Personal Computing segment this quarter due to the ongoing impacts of the Covid-19 health emergency. The revised expectations were solely due to lowered Surface and Windows OEM expectations and there were no other changes to guidance. We view this as a temporary issue and not indicative of the demand for MSFT products." Thill maintained his $195 price target on MSFT while trimming EPS slightly for the first half.
And on March 1, Dan Ives -- who I just had as a guest on the Mind Over Money podcast last month -- wrote this to investors...
Does coronavirus negatively impact the supply chain, cause massive demand uncertainty in the near-term around consumers/enterprises, and ultimately add a major risk profile to valuations and tech stock multiples that has just been rapidly factored into the market over the last week? The answer is a clear YES. However, does coronavirus massively disrupt/erase the long-term transformational bullish trends of cloud computing, 5G, EV, streaming, and cyber security for the next few years? The answer in our opinion is a resounding NO.
To hear Dan opine on this "unprecedented tech bull market driven by themes such as the enterprise move to cloud computing, a transformational 5G super cycle, EV auto demand inflection, streaming cord cutting paradigm shift, and cyber security all representing some of the major game changing trends poised to change the consumer and enterprise landscape for the next decade," check out our interview here...
Tech Investing 101: Know, Buy, Hold Disruptive Growth
Investors who missed the great rallies to new highs in Apple and Microsoft this year have been wondering why, and wishing they listened to Dan Ives all last year. And these gems remain among his top stocks to accumulate during this correction. Tesla is near the top of his shopping list too.
Big Data Will Boost Cloud Revenues Over $40 Billion
Finally, it's worth noting that Microsoft's primary growth driver won't be impacted by global slowdown worries, with Intelligent Cloud (IC) growing at over 20% last year and likely to repeat in 2020. Here's what my colleague Dan Laboe wrote in his profile two weeks ago...
Microsoft has become the largest publicly traded company in the US because of its best-in-class management team that has been able to stay ahead of the competitive curve for decades. Microsoft was the largest company by market cap at the turn of the millennium, and 20 years later, this enterprise has taken the helm once again.
This software giant has been a role model for tech start-ups around the world. Microsoft has controlled the computer OS market for decades and is now taking control of the cloud computing market. The effective transition from on-premise software to cloud-based systems has brought this legacy firm back to its place at the top.
Microsoft’s new subscription-based revenue drivers, whether it’s Microsoft Office or one of its many cloud services its offer, has allowed this enterprise to grow out its sales by reliable double-digit percentages YoY. Microsoft offers customers Infrastructure-as-a-Service (IaaS) through its platform, Azure, competing in this very lucrative but quickly saturating business with tech giants like Amazon and Alphabet.
The $50 billion IaaS industry is proliferating, and more businesses see the benefit of outsourcing their tech infrastructure. Amazon’s AWS has controlled the space as an early mover on cloud computing, but Azure is slowly but surely taking market share. Azure is in an early stage of development compared to AWS, but it is being offered at a fraction of the price, growing at double the rate, and analysts are calling it best-in-class.
(end of Dan Laboe's commentary)
Bottom line: In Microsoft's leading position in these technologies, large investors will continue to find safe harbor in its steady growth. And in a strong bull market, Microsoft shares will very likely ascend over 30X this year's projected $6 EPS.
Bear of the Day:
Shopify is the $55 billion upstart taking on Amazon and Ebay in the small business etailer platform market.
And earnings estimates just plunged after the company revealed a big investment year ahead in their Q4 report delivered on February 12.
Since that reveal, the Zacks consensus for full-year 2020 EPS dropped over 75% from $0.89 to $0.21. Next year got clobbered 55% from $1.60 to just $0.72.
Analysts also found themselves having to adjust their ratings as well since the hyper-growth platform trades at 25 times sales.
Shopify was downgraded to Neutral from Outperform at Credit Suisse with analyst Brad Zelnick saying that despite another strong quarter from Shopify -- and his positive fundamental view on the company's long-term opportunity and belief in management's strategy and ability to execute -- he cut the shares on its "lofty valuation and embedded expectations."
Yet, price targets were raised dramatically across the board in February after the company call, and that's why shares soared from $500 to nearly $600 on Feb 12...
SunTrust: Hold $340 to $585
Baird: Outperform $465 to $590
Wedbush: Neutral $325 to $475
Wells Fargo: Overweight $400 to $600
KeyCorp: Overweight $485 to $575
Rosenblatt: Buy $481 to $630
UBS Group: Underperform $450
Credit Suisse: Neutral $450 to $575
Raymond James: Outperform $365 to $600
Canaccord Genuity: Buy $385 to $600
Royal Bank of Canada: Outperform $400 to $650
Investors wanting to get into Shopify (myself included) probably thought we were going to get our chance in the recent correction.
I wanted to get in on the Jan 9 gap fill near $420 but I was too slow on Friday.
Now I'll have to wait until SHOP is out of the Zacks Rank cellar.
Additional content:
I’m Not Selling… Because Robinhood Won’t Let Me
The markets are bouncing today following the biggest one-week drop off since the financial crisis in 2008. The Dow Jones Industrial plummeted over 3500 points last week, representing the largest one-week point drop in the history of the index. Today the markets are beginning to recover, and investors are buying the dip. At the height of trading excitement, millennials’ favorite trading platform, Robinhood, is suffering a system-wide outage.
The over 10 million users on Robinhood’s free-trading platform have seen their current holdings frozen with no way to buy or sell any asset. I purchased Microsoft calls on Friday through Robinhood’s mobile applications, which I planned on selling today (Monday, March 2nd) for a quick turnaround but am unable to get out of my positions. This is a horrible sign for the mobile trading start-up. Robinhood is best known for its industry-disrupting offering of commission-free trading.
The markets are hitting record high volumes today, and Robinhood’s server infrastructure is not developed enough to handle its 10+ million users. Highly volatile markets with massive volume have never tested the company, and the fact that it has frozen everyone’s assets during the market biggest one day rally of the year is not only beyond frustrating but a massive red flag. This inability to service customers when they need it the most makes me question the firm’s ability to be recognized as a legitimate trading platform.
Robinhood’s platform demonstrated a flaw last fall when individuals were able to gain “infinite leverage” through a loophole that the company has since fixed. This shows the firm’s platform is still at an earlier stage in development than its competitors and has bugs.
Robinhood has lost the faith of many of its users, and the platform will undoubtedly lose a significant number of investors if they do not appropriately handle this shutdown. The platform’s nonexistent liquidity today is going to cost the company a lot. If Robinhood doesn’t have the cash to compensate those that lost money from this freeze appropriately, they risk not only losing clients but potential lawsuits.
Millennial investors are going to turn to more mature trading platforms that can handle any level of traffic like Charles Schwab and TD Ameritrade, which recently announced a $26 billion merger. E-Trade also stands to gain, with Morgan Stanley, who just announced it would be buying the company for $13 billion.
The consolidation of these “more legitimate” online brokerages will allow the companies to leverage competitive scale advantages that Robinhood’s young platform is unable to do. There have been discussions of the business taking its shares public. This outage will likely put this pending IPO on hold.
Take Away
The system-wide outage on one of the highest volume trading days could mark the end of Robinhood if it is not corrected and investors aren’t made whole. Robinhood’s 10+ clients represents a massive potential market for competing trading platforms if these investors decide their money would be safer with one of the more mature brokerages.
As of 2 pm Eastern Standard time, the platform is still down, and there is no news or timeline about when to expect it back up.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
See their latest picks free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.