The first-quarter earnings season gets underway next week for technology companies, and it will bring with it the first glimpse of an economy that could be very ugly for many of them.
The world changed two thirds of the way through the March quarter, as Europe became besieged by COVID-19, and the U.S. went into lockdown. But very little of that is reflected in Wall Street’s estimates for tech companies’ revenue and profit, and the stocks have lately been zooming as if the world is turning a corner.
That goes for some of tech’s biggest companies, including ones that will report starting Monday, such as International Business Machines (IBM) - Get Report, Texas Instruments (TXN) - Get Report, Tesla (TSLA) - Get Report, Amazon (AMZN) - Get Report, Intel (INTC) - Get Report, AT&T (T) - Get Report and Verizon Communications (VZ) - Get Report. The forecasts for these companies for the rest of this year are little changed from what they were two months ago despite what is increasingly looking like a very hard landing for the U.S. economy and possibly the world.
Wall Street stock analysts have dutifully held off on changing their estimates until they hear company managements weigh in on their quarterly conference calls. That’s not a total surprise, with analysts having done the same in the Great Recession of 2008-09.
That reluctance on the part of most of the analysts to predict anything leaves investors with little to go on and in the breach, many stocks are celebrating.The Nasdaq Composite Index is up 24% since it hit its lowest point in years, on March 23, and it is up 13% just in the past week.
The risk is not the first quarter’s report, however, but what comes after that. Some tech companies have pre-announced Q1 results that overall beat expectations. Tesla, for example, on April 3 reported first-quarter auto deliveries that were better than Wall Street’s estimate. But as Dan Ives with Wedbush Securities, who has a Neutral rating on Tesla shares, explained in a note to clients, “the big question for investors going forward is around the demand trajectory for 2Q [and the] rest of the year, and cash burn as this uncertain consumer environment plays out in the field.”
Note that's not just demand, but production. Can Tesla even make enough cars to meet whatever demand it does have? As reported by The Wall Street Journal Tuesday, Tesla is asking for concessions from some of its landlords while its California factory is shut down. How long will the assembly line in the U.S. remain under lockdown, and how hard will it hit production?
The average estimate for Tesla’s full-year 2020 revenue stands at $30.1 billion, which is about 6% below what the estimate was back at the end of February. That would still imply 23% revenue growth this year over 2019, though, which would be faster than last year's revenue growth rate of 15%.
A projection for revenue growth to accelerate in what may be one of the harshest downturns in U.S. history doesn’t sound realistic.
While the average estimate hasn’t moved much, there are a couple of analysts here and there who are daring and decide to imagine the best and the worst. And the spread of estimates between Tesla's optimists and pessimists is telling. The highest estimate is $36 billion, and the lowest, $22 billion. Chances are, the full year is going to be a lot closer to $22 billion than to $36 billion.
What about chip makers Texas Instruments and Intel, which are also reporting next week? Unlike Tesla, they are old enough to have been well-established when the 2008 recession hit. The most challenging point was in 2009, when Texas Instruments’s revenue declined almost 17%, and Intel’s revenue declined by 6.5%, year over year.
But those numbers don’t tell the whole story. The final revenue total for each company came in well below what was originally estimated for the companies before the severity of the recession became clear.
Revenue at TI ended up being 33% lower in 2009 than the Street had estimated in August of 2008. That was before Lehman Brothers collapsed in September of that year, which was the real sign to everyone just how bad things were going to get.
And Intel’s revenue ended up being 20% lower for 2009 than analysts had been expecting in August of 2008.
So, expectations can go a lot lower as the full effects of a recession become clear. The same thing happened to IBM: Its revenue ended up $19 billion lower in 2009 than analysts had been forecasting in the late summer of 2008, a 17% shortfall.
Perhaps the most intriguing prospect next week is Amazon. The company is hiring tens of thousands of extra workers to staff warehouses and it certainly seems that Amazon has become a pipeline for essentials for much of America if not the world. That should make Amazon recession-resilient, if not recession-proof.
Current estimates have Amazon revenue rising by 19% this year, almost as much as last year's growth. And the data from 2009 are encouraging. Amazon’s sales in 2009 rose by 27.9%, year over year, almost as much as the growth rate the year prior. In fact, 2009’s revenue ended up only slightly less than analysts had been predicting in the summer of 2008. Amazon held up very well.
Now, Amazon was a lot smaller in 2009 -- just $25 billion in annual revenue versus what may be $334 billion this year. So, the COVID-19 economy will be a test of whether being vastly larger now and a prime beneficiary of various stay-at-home directives gives Amazon extra staying power in a crisis.