Looking Chipper: Tech Sector Earnings Seen Boosted by Semis; AMD Results Ahead

The chip sector is in sharp focus as Q4 Technology earnings start coming in. Advanced Micro Devices, Intel, and Texas Instruments are among the first to watch, with Apple, Microsoft in the wings.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/semiconductors: AMD, other tech firms reporting
5 min read
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Key Takeaways

  • Tech ends the year as the highest-performing sector, with AMD leading

  • Semiconductors lead all tech industries in earnings-per-share guidance
  • Analysts’ price projections for the sector, however, are somewhat tepid

As we head into the Technology sector’s Q4 earnings season, let’s just note that the sector not only came in first above all others in 2019, gaining upwards of 40%, it also topped every sector over the last decade, gaining an astounding 328%.

And Advanced Micro Devices (AMD), which reports next Tuesday after the close, rose an eye-popping 148% last year to lead the semiconductor sub-sector of Technology. The so-called “chip” stocks like AMD helped keep Technology hopping for most of 2019, especially in the second half.

So, what might this all mean for the sector moving forward? In the last month (from mid-December to mid-January), Technology’s rally slowed a bit compared with the broader market, advancing 2.41% to the S&P 500’s gain of 3.58%. Although analysts may be anticipating a 2% earnings decline for S&P 500 stocks overall, Technology seems to be one sector shining bright, with more companies issuing positive than negative guidance, according to research firm FactSet.

Chipmakers Hold Highest Earnings-Per-Share Guidance

Chipmakers have been outpacing the S&P 500 since the end of last year’s Q3. Much of this performance probably reflected optimism about a trade war resolution, a fundamental hurdle which, once resolved, can mean stronger growth in the coming months. Now, with threats of a trade war seemingly a little less front and center, investor sentiment in the chipmaker space appears to be sprinting ahead. The PHLX Semiconductor Index (SOX) is within arm’s reach of its 52-week high.

With its Q4 earnings right around the corner, shares of AMD have risen into record-high territory. With AMD’s second-generation processors hitting the data center and gaming space, analysts anticipate significant share gain, revenue, and EPS growth moving forward. Though AMD once held the spot of formidable competitor to chip behemoth Intel (INTC), some analysts seem to think that the roles have now been “switched,” according to a MarketWatch report.

Another stock outperforming the industry average is chipmaker Nvidia Corp (NVDA) which, despite its revenue showing a 5% year-over-year decline last November, beat Q3 analyst expectations. The stock rose 76% last year and appears to be gaining momentum. Research firm Needham recently upgraded the stock from Underperform to Hold, citing optimism over the company’s data-center and gaming business.

But these two areas can also be viewed as the company’s biggest risk factors, according to research firm CFRA. Lower data center spending, weaker chip sales, and increased competition in the semiconductor space are factors that may weigh on NVDA’s performance in the months to come.

While AMD reports next week, two other closely watched chipmakers—Texas Instruments (TXN) and Intel (INTC)—report later today and tomorrow, respectively.

Overall, the industry outlook for semiconductors remains positive as chipmakers lead the sector in earnings-per-share guidance. However, the industry’s ratings momentum shows that company downgrades have exceeded upgrades. So for anyone investing in this space, choose your chips carefully.

Trade Tensions No Longer a Hurdle for Tech?

Fear of a protracted U.S.-China trade war was arguably the biggest factor pummeling tech market sentiment in 2019, though judging by the sector’s performance, it didn’t hurt price action too much. Given tech’s huge sales and supply chain exposure to China, the kind of day-to-day headline risks and crazy market volatility that we saw last year might have had some investors nervous.

So, when Washington and Beijing finally announced at the end of Q4 that the two nations were moving toward a resolution—the ever so elusive “phase one” trade deal—not surprisingly, tech stocks jumped, pushing the sector well into record-high territory.

Tech Hardware Leads Sector Growth 

Turning toward the industry level, Technology Hardware appears to be in the lead. Apple (AAPL), the industry’s largest stock by market cap, began the new year soaring into record high territory after data revealed that iPhone sales in China increased by around 18% through the end of the year. AAPL’s anticipated 5G launch later this year has also stoked optimism among analysts.

Hardware’s three-month growth of over 33% is nearly triple that of semiconductors, its closest runner-up at 13.4%. However, you might want to exercise a bit of caution because, as the saying goes, things that go up have a tendency to come back down eventually. In other words, industry demand is cyclical. And hardware is one industry alongside semiconductors showing net negative momentum among a handful of top rating firms (based on the industry’s “Rating Momentum” score which TD Ameritrade clients can find on the TD Ameritrade sector research dashboard). 


energy sector lagging SPX

FIGURE 1: CHIPS KEEPING UP. The chip sector (SOX—candlestick) is up double-digits over the last three months, keeping pace with the broader S&P 500 Technology sector (IXT—purple line) Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Ascending On a Cloud

Software’s cutting edge may have transcended earthly domains toward that nebulous digital netherworld we now call “the cloud.” And in that space, two behemoths—software giant Microsoft (MSFT) and its Consumer Discretionary rival, Amazon (AMZN)—are in a fierce battle for data center dominance.

So far, it appears that MSFT is gaining the upper hand. According to a recent Goldman Sachs survey of tech spending in large companies, more IT executives are using MSFT’s Azure over AMZN’s AWS cloud computing platform. Plus, the respondents indicated that they plan on adopting Azure over other cloud services.

Goldman analysts estimated that only 23% of all digital workloads take place in the cloud. They forecast that figure to increase to 43% in the coming years. So there may still be plenty of market share left to battle over in the years to come. 

Oracle (ORCL) reports later in the quarter, but last month posted revenue for its most recent period that fell short of analysts’ average estimate. Chief Executive Safra Catz said in a conference call that revenue is expected to grow 1% to 3% in the current quarter, MarketWatch reported.

Q4 Technology Earnings

Moving forward, what might analysts expect from tech? Looking at data from research firm FactSet, it appears that the Technology sector leads all others in positive earnings-per-share (EPS) guidance. At the industry level, this front-runner position is led by semiconductors.

However, FactSet sees Technology’s Q4 earnings per share falling 1.8%, only a slightly better than a negative 2% for the broader S&P 500. Revenue for tech firms is forecast to rise 4%, which is better than FactSet’s 2.6% estimate for all S&P 500 companies. 

Technology’s forward 12-month price-to-earnings (PE) valuation at 22.3 is also second highest, and well above the S&P 500’s 10-year average. However, analysts’ 12-month price projections for tech, a mere 1.7%, places the sector at the bottom in terms of growth forecast. 

Good Trading,
JJ
@TDAJJKinahan

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Key Takeaways

  • Tech ends the year as the highest-performing sector, with AMD leading

  • Semiconductors lead all tech industries in earnings-per-share guidance
  • Analysts’ price projections for the sector, however, are somewhat tepid

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