Microsoft reports quarterly earnings after the closing bell Tuesday.
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Tech investors are feeling the pain.
The Nasdaq Composite index, which is heavily weighted with technology companies, just notched its worst week since March 2020, and is now down 14% from its all-time high in November, putting it firmly in correction territory.
A laundry list of concerns is to blame, including tightening monetary policy from the Federal Reserve as well as elevated bond yields. Many tech stock valuations bank on profits years into the future, and higher yields tend to discount the present value of future cash.
Weak corporate earnings only add to the gloomy picture, and indications of slowing growth at Netflix (ticker: NFLX) seems to have been a nail in the coffin for Friday’s 2.7% drop in the Nasdaq.
“Anyone hoping for a measure of calm on the markets after a testing period is likely to be disappointed as we start what could be another turbulent week,” said Russ Mould, an analyst at broker AJ Bell.
Stock futures were signaling the Nasdaq would open 0.4% lower Monday to deepen the correction. To say the least: Tech stocks need some good news.
Investors should watch corporate earnings. Results season gets into full swing this week, with more than 100 constituents of the S&P 500 index reporting, including Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA).
“Perhaps Apple, Microsoft and Tesla can come to the rescue with some knockout numbers when they report this week,” Mould said. “On the other hand, a series of disappointing updates from these technology titans would only undermine sentiment further.”
Some analysts are upbeat about Microsoft, in particular. Good news out of the Redmond, Washington-based tech giant after the bell Tuesday could help slow, or even reverse, the tech stock rout.
“This will be a ‘key print for the tech sector’ to watch as investors remain very skittish on tech stocks with the Fed tightening/jawboning narrative coupled by Netflix’s disaster guidance casting a dark shadow on the sector heading into this week,” said Dan Ives, an analyst at broker and investment bank Wedbush.
Ives has previously outlined how this could be a watershed earnings season for the tech sector, with strong 2022 guidance potentially ushering in a new wave of bullishness on tech.
When it comes to Microsoft, Wedbush is expecting strong earnings and a strong outlook driven by growth in cloud software.
“Based on our recent checks we believe the company saw another robust performance in the December quarter led by Azure/Office 365 with our expectations to see a ~3% top-line beat and upside across the board which should be a major boost in the arm for the overall tech sector looking ahead,” Ives said.
Wall Street, according to FactSet, expects Microsoft to report quarterly earnings per share of $2.32 from $50.7 billion in sales.
Microsoft has recently been in the news for its planned acquisition of gaming group Activision Blizzard (ATVI) for almost $69 billion, which would be the biggest takeover in tech sector history. But, for Ives, “the underlying growth story is built around the game changing enterprise cloud transformation which is giving [CEO Satya] Nadella & Co. clear tailwinds into 2022/2023.”
Ives believes major cloud deals are up more than 50% at Microsoft, with “clear momentum” into 2022 as deal sizes also increase.
Indications that this is the case, on top of strong earnings, could be good news for Microsoft. And in the current environment, that could be great news for tech stocks at large.
Write to Jack Denton at [email protected]
