Today's negative pre-announcement from Cirrus Logic (CRUS) adds to the cloudy outlook for Apple (AAPL). In many ways, Apple's problems are very company-specific: a function of competitors are finally catching up to it. Apple's smart-phones and tablets no longer have the field to themselves. What this means is that Apple's growth outlook is a lot less certain than was previously believed.
We will know more about Apple's earnings picture as the company reports Q1 results after the close on April 23rd. But the current Zacks Consensus estimate for Q1 is down almost 14% in the last three months and estimates for the coming quarters likely have more room to come down. In terms of growth, Apple's total Q1 earnings are expected to be down roughly -16% from the same period last year.
The Key Trends
Apple's problems may be company specific, but plenty of its hitherto high-flying Technology peers are faced with similar earnings challenges. We saw in Intel's (INTC) earnings report on Tuesday how the weak PC demand picture is weighing on its outlook.
The situation isn't much different for other PC centric players like Hewlett-Packard (HPQ), Dell (DELL), Microsoft (MSFT) and Advanced Micro Devices (AMD), to name just a few. Ironically, Apple played a leading role in bringing the PC market to its knees.
Others are faced with different headwinds that lead to the same earnings challenges. Companies with advertizing-based business models like Google (GOOG), Facebook (FB), Yahoo (YHOO) and others are struggling with monetizing the secular shift from PC to mobile devices. This platform shift has material consequences for these companies' margins, as do the headwinds facing Apple and the PC players.
Expectations for Q1
These trends are clearly visible in the aggregate earnings expectations for the sector. And let's not forget, Technology is the largest earnings contributor to the S&P 500. It's not without basis to say that 'as goes Tech, so goes the S&P 500.' Total earnings for the sector are expected to be down -8% from the same period last year, which is a big contributor to the expected -1.6% decline for the S&P 500 as whole.
The revenue picture isn't that bad, with total sector revenues in Q1 expected to be up +2.8%. And this spotlights the margin problem we referred to earlier for the individual companies. Net margins for the sector in Q1 are expected to be down more than 200 basis points from the same period last year and essentially flat from the preceding quarter.
What About Beyond Q1?
In terms of earnings, the first and third quarters are typically the seasonally weak periods for the sector. As such, the market may be willing to cut the Tech companies some slack for a weak showing this reporting season. But a lot will depend on how they guide towards the coming quarters, as expectations for the coming quarters, particularly the second half of the year, are for a resumption of strong growth.
Current consensus expectations are for total Tech sector earnings to increase by +8% in the second half of the year after declining by -5% in the first half. The second half recovery is then expected to carry into 2014, resulting total earnings growth for the sector of +13.3%.
A big part of these second-half 2013 and full-year 2014 earnings recovery hopes rest on margin expansion. On a quarterly basis, net margins for the sector peaked in 2012 Q3 and have yet to get back to those levels.
On an annual basis, the sector's net margins have been essentially flat since 2011, but are expected to make strong gains later this year and next year after contracting in the first half of 2013. Hard to envision such margin gains given the multiple headwinds facing them.
Putting It All Together
What all this boils down to is that earnings expectations for the broader S&P 500 in general and the dominant Technology sector in particularly remain elevated. I am not talking about estimates for the currently underway first quarter of 2013, but the coming quarters, particularly the second half of the year and next year. Those estimates need to come down and they most likely will come down after we hear from management teams.
Tech stocks haven't been the leading stock market performers this year, up +8.6% year to date vs. the +11.4% gain for the S&P 500 in that same time period. It is perhaps reasonable to expect this group to give back some of those gains in the coming days.