As tech companies gear up to report their fourth-quarter and year-end results, it’s worth looking back at the industry’s erratic year. Two of the highest fliers, Apple Inc. and Facebook Inc., lost a combined $400 billion in market cap since September, according to Bloomberg data. Part of the problem was external (see: a trade war with China), but some of the damage was self-inflicted too. When they report earnings this week, tech’s biggest players will get their first shot at recasting the narrative for a better 2019.
Facebook had a particularly tough year, largely thanks to factors under its control. The company continued to make missteps that cost it much-needed consumer trust, it found itself in the hot seat in Washington a few times, and some of its newer products like Facebook Watch failed to gain traction. Numbers that Wall Street will be keeping a close eye on for its Wednesday report will be how many people are using the service and how often, as well how the advertising business might have been impacted by its recent scandals. So far, even though the big political and social questions surrounding Big Tech are showing no signs of going away, advertisers see its products as an increasingly critical way to reach the users who stick around.
Apple has sought to place the blame for its lackluster 2018 performance largely on the mounting trade tensions between the U.S. and China. In his letter to employees in January, Chief Executive Officer Tim Cook wrote, “We did not foresee the magnitude of the economic deceleration, particularly in Greater China.” And added that “most” of the company’s revenue shortfall and “over 100 percent of our year-over-year worldwide revenue decline” occurred in the region. Exactly how bad or good was the fourth-quarter? We may never know. Apple recently stopped reporting some key numbers around product sales.
The new disclosure limits may be in anticipation of a weak fourth quarter, some analysts have said. Expect Wall Street to ask Apple for updates on China when it reports on Tuesday. This could be the company’s first holiday revenue decline since 2001.
Amazon’s stock was similarly battered during the last few months of the year, but it’s already started to bounce back, climbing more than 20 percent since a dip in December. (And it handily beat the S&P since the start of last year.) Part of the turn was due to what is expected to be a strong holiday season. We’ll find out on Thursday if Santa delivered as many Amazon packages as analysts expected.
Apple, Facebook, Amazon report this week — and there could more risk. Park your money in longer-term put options
Apple Inc. will kick off what may prove to be a crucial earnings week for the world’s tech giants on Tuesday amid concerns that it may stumble out of the gate.
After a miserable December that saw the Nasdaq Composite Index and the S&P500 enter bear market territory, North American markets have rebounded in January, easing fears that a global slowdown could lead into a recession. Since Dec. 31, the Nasdaq Composite Index is up 6.7 per cent, while the S&P/TSX Composite Index gained more than seven per cent.
The market’s bounceback hasn’t comforted Horizons ETFs portfolio manager Hans Albrecht, who describes it as a “show-me-first market” — one that requires positive results to convince investors to buy in. With Apple, Amazon.com Inc. and Facebook Inc. each reporting this week, it’s set to get its first major test of 2019.
“I think the market is on tenterhooks,” said Albrecht, who runs a covered-call fund that is made up of some of the largest tech companies in the world. “I think at any moment we could see a resumption of that selling.”
Of the tech giants, Albrecht and KeyBanc Capital Markets analyst Andy Hargreaves agree that Apple is the one investors should be most concerned with. In terms of its impact on the market, Apple’s earnings could signal broader issues in the global market, Hargreaves said.
In a letter to investors, Apple CEO Tim Cook already warned that revenue for the company’s first fiscal quarter, which ended on Dec. 29, would be 15 per cent weaker than expected, blaming the shortfall on iPhone sales in China.
Although the company, which shocked analysts last year by announcing it would no longer publish iPhone sales numbers before posting an earnings miss, has already announced its bad news, analysts are still in the dark over guidance. Should those numbers fail to impress, it would suggest to Hargreaves that the company’s issues have seeped into its other products and other geographical locations. Even though Apple’s stock has plunged more than 33 per cent since hitting a peak in October, it remains a risky play.
“I’m still of the view that there’s more risk there than opportunity for upside even with the big reset because the perception there is that it’s still mostly a China issue … and that the rest of the world is fine,” Hargreaves said.
I think at any moment we could see a resumption of that selling.Hans Albrecht, Horizons ETFs
While poorly received guidance from Apple could offer yet another sign of a global slowdown and convince investors to sell, an earnings miss for Facebook would be treated differently, Hargreaves said. For the social media company, which has seen headline risk mainly over privacy concerns, a miss would instead be seen as a company-specific problem, lessening its potential to drag the market down.
According to BMO Capital Markets analyst Daniel Salmon, the stock is still expected to outperform as long as “Custom Audiences capabilities are not hindered by regulation and negative press doesn’t thwart agencies/brands, but visibility remains low.”
Due to the possible return of volatility, Albrecht suggested investors should dip into the options market for protection. Buying puts on the individual names would leave investors at the mercy of inflated volatility, he said. He suggests buying six-month to one-year put options on the Nasdaq Composite Index with a 12 per cent strike range on the downside, he said. They’re more expensive than short-term puts, he said, but would protect investors in the event the FAANG stocks are responsible for volatility returning to the market.
“Spend your money on your insurance like you would for your house or your car and hope you don’t need it,” Albrecht said.