Tech stocks briefly fell into correction on Tuesday before bouncing back from their lows — though the Nasdaq is still about 9% below its all-time highs.
Microsoft (MSFT) will report its results after the closing bell Wednesday and analysts are estimating that the company will report an increase of nearly 15% for both sales and earnings per share, thanks largely to strength in its cloud business.
Netflix already kicked off tech earnings season last week when it reported a healthy jump in subscribers. But the party was short-lived for it and fellow FANG stocks Facebook, Amazon and Google.
Netflix (NFLX) rose more than 5% the day after its earnings report but has fallen 9% since then.
“You can’t just say tech is going to do great or even that FANG is going to do great. You have to be more selective,” said Daniel Morgan, senior portfolio manager with Synovus Trust Company.
Time to pick and choose in tech
Bigger picture concerns about the broader market have returned in the past few days, most notably worries about rising interest rates, increased regulation in light of the data scandal at Facebook (the F in FANG) and the escalating trade war with China.
Tech isn’t immune from these macro market trends. In fact, some would argue that tech has more room to fall because the sector has been doing so well for so long.
“You didn’t have to be discerning with tech before since it has been doing so well for the past decade. But now, people have to look at the various valuations and how each company is doing,” said Sylvia Jablonski, institutional ETF Strategist at Direxion.
For example, she added, Alphabet parent Google (the G in FANG) and Amazon (the A in FANG) both have big, growing cloud units — just like Microsoft. Both will report their latest earnings after the close on Thursday.
But Google (GOOGL) has been held back by the same privacy concerns that have hurt Facebook, particularly with its YouTube unit. Meanwhile, Amazon (AMZN) seems unstoppable and the company is increasingly getting into more new businesses.
As a result, Jablonski said, Google shares might be a good value at a time when the broader tech sector still looks expensive.
Tony Roth, chief investment officer with Wilmington Trust, agreed. He said investors have to pick their spots in tech right now.
“Tech is not monolithic. Some of the well-known names like Google, Apple and Microsoft still look attractive,” Roth said. “And then you have Cisco and Oracle, whch have made successful transitions to the cloud.”
But Roth noted that other companies are struggling.
He pointed to sluggish growth at IBM (IBM) last week and disappointing results from semiconductor leader Texas Instruments (TXN) after the closing bell Tuesday. That may not bode well for Intel (INTC), which reports earnings Thursday afternoon.
Facebook (FB) doesn’t report until next week but Twitter (TWTR) will release its latest results Thursday morning and Snapchat parent Snap (SNAP) reports after the closing bell Thursday.
Slowing economic growth will eventually dent tech
Both Twitter and Snap have plunged since their second quarter earnings reports this summer due to worries about user growth.
And concerns about increased regulations abroad in the wake of privacy scandals could make it tougher for all the social media companies.
“What’s also important to keep an eye on is the international landscape, which is much different than what we see here. Trade tensions and varying international regulations could make it more difficult to grow abroad,” said Mike Loewengart, vice president of investment strategy for E*Trade.
Then there’s the outlook part of the equation. Synovus Trust’s Morgan noted that the tech sector is only as good as the broader economy.
If the combination of a trade war, higher rates and the fading sugar high from lower tax rates start to weigh on growth, that will be bad news for tech.
“Strong earnings may not be enough to move the barometer for tech because sentiment is no negative. GDP could be the kiss of death. If GDP falls through the roof, techs will get crushed,” Morgan said.
“Corporate IT managers will pull the rug when it comes to spending. That concern is out there. Tech spending could slow in 2019,” he added.
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