Earnings season is important for all companies, but technology stocks in particular have a lot to prove each three-month period.
That’s because other industries can be susceptible to big-picture trends like the regulatory environment or consumer spending, but many tech stocks live and die on the strength of their unique product offerings.
As a stock-picker, I love this fact. A disruptive or dominant technology has the ability to move separately from the broader S&P 500 Index SPX, -0.15% or global economic conditions. And that means if you do your research and find the right stocks to buy, you can really make a difference in the overall performance of your portfolio.
The challenge is finding tech stocks with fundamentals that matter instead of just another fashionable momentum play. A number of tech players put up first-quarter numbers that proved their stuff. These winners saw an immediate pop in their stock prices, and look to continue trending upward in 2017 regardless of the broader market.
And on the flip side, there are a handful of big losers that couldn’t live up to expectations. Their unprofitable operations counted against them, yes, but worse are the individual narratives that indicate those losses won’t end anytime soon.
After tallying the tech earnings, I have three big winners and three big losers I’m watching now:
No. 1 winner — Nvidia
After tripling across the 12 months before its most recent earnings, Nvidia Corp.NVDA, +1.10% certainly had a heavy burden of investor expectations going into its May report, particularly regarding its closely watched gaming division amid signs of a slowdown that could weigh on results. But when the final numbers were tallied, the momentum darling held its own and then some.
Shares have popped over 20% in the past few days immediately after earnings, thanks to net income that more than doubled. While many investors piled into Nvidia on hopes and dreams of virtual-reality (VR) capabilities that will deliver in the long term, those numbers showed in black and white that this tech giant is also very relevant in the here and now.
Yes, the gaming segment is slowing. But good tech stocks don’t just cling to fading revenue streams; they create new ones. That’s what Nvidia has done with its surging data-center business that delivered in the short term, and its heavy investments in VR to drive long-term success. NVDA has a stretched valuation and a fashionable following, so it may indeed see a dip in the coming months, but with a real foundation under all the hype, I wouldn’t expect it to stay down for long.
After all, high expectations didn’t seem to bother Nvidia this time around.
No. 2 winner — Electronic Arts
It’s not an easy time to be a video-game studio. Mobile gaming has spawned many more competitors in the space, and margins are thinner there than for traditional console games. However, Electronic Arts Inc. EA, +0.47% continues to prove it isn’t going anywhere — and its most recent earnings are just the latest evidence.
Fiscal-fourth quarter results beat analysts’ estimates handily on the top and bottom lines, and EA’s forward profit guidance was also way above expectations. Shares took off 15% on the results.
The earnings were nice, yes, but it’s important to realize investors have been looking beyond profits and sales lately. What they want is a clear strategy to prosper in a digital age, and EA provided that with 61% of its net revenue coming from digital sales, up from 55% in the prior year. What’s more, profit margins also improved amid this transition.
It’s not just the quantity of the earnings beat here, but it’s the quality of where those profits and sales came from. The whole package clearly impressed Wall Street, and should continue to bolster EA’s stock.
No. 3 winner — Twitter
I have been a relentless critic of Twitter Inc. TWTR, +1.20% over the years, in part because of its persistent lack of profits and growth. But even I’ll admit that Twitter showed some material signs of life in its most recent quarter that include a nice increase in both monthly and daily users as well as significantly better bottom-line performance.
The million-dollar question is how Twitter performs going forward, and I remain skeptical it has what it takes to go toe-to-toe with Facebook Inc. FB, +0.19%Alphabet Inc. GOOG, +0.17% and the other internet-advertising giants of the world.
But in addition to a stubbornly loyal group of Wall Street believers, Twitter finally seems to have found a broader foothold with investors. Twitter was slipping toward prior lows in April but bounced nicely on those earnings, and short-sellers have been forced into hiding. That bodes well for the coming months.
(On the next page, read about three tech stocks that proved to be losers last quarter.)
No. 1 loser — Yelp
Yelp Inc. YELP, -2.05% has a rocky history. It priced its IPO at $15, soared more than 60% on its first day of trading and raced up to a high just below $100 in 2014 as profits finally materialized. But the online-review giant saw its profits evaporate in 2015, and in early 2016 traded back in the $15 range.
This was supposed to be the year Yelp got its act back together, with shares almost tripling from those 2016 lows into early 2017. That is, before earnings erased much of those gains in short order.
In February, weak guidance weighed on the stock. And when Yelp followed up with a first-quarter report that missed on the top line and offered an equally worrisome outlook, investors had enough — and with very good reason.
Yelp claims it has stopped the bleeding with its advertisers, but a checkered past and two consecutive rounds of disappointing earnings have burned up all the goodwill on Wall Street. There’s very little chance the review site will reverse that trend soon.
No. 2 loser — Snap
Snap Inc. SNAP, +6.04% has been in deep trouble after earnings, suffering a 20%-plus decline after its report dropped. Sure, it was partially the $2.2 billion loss that sent investors running, but it didn’t help that tone-deaf CEO Evan Spiegel simply laughed when asked about the powerhouse that is Facebook, and then compared the $430 billion internet-ad giant to Yahoo! Inc. YHOO, -0.08%
Admittedly, some analysts are still cautiously bullish on the long-term growth prospects of Snap’s stock. After all, one earnings report isn’t everything. But keep in mind this is a company that’s already seven years old, and a firm that went public but gave shareholders zero say in the direction of the company.
Maybe Snap will get its act together eventually. But that may not happen any time in 2017, and it will take serious effort on behalf of Spiegel to win investor trust given his unchecked power as an executive and his uninspiring first earnings call.
No. 3 loser — AMD
Even after a 20% flop in the wake of earnings, Advanced Micro Devices Inc.AMD, +1.72% is still up about 200% in the past 12 months. That makes it less of a dog than Snap and Yelp stock, but it’s important to remember that past performance is never indicative of future returns.
After all, let’s admit that AMD’s run was in large part because of a buyout premium that was rapidly priced into the shares after constant consolidation in the semiconductor space — the late-2016 buyout of NXP Semiconductors NVNXPI, +0.01% by Qualcomm Inc. QCOM, +1.17% was the latest mega-merger.
But AMD found itself trading for nearly 50 times earnings earlier in 2017 with no acquisition offers forthcoming. And after posting another loss and ho-hum guidance in its most recent quarter, Wall Street got tired of just waiting and hoping for margins to improve. Investors punished AMD by more than 25% in a few trading days and more than 30% from February’s 52-week high before it started a small recovery.
I warned this might happen when I named AMD as one of my top stocks to sell in May, but hey, on the plus side, maybe that big buyout deal will transpire now that it’s more fairly priced. However, if AMD’s core business doesn’t start to deliver on its own, it could be a very rough 2017 for the chipmaker.