Why Apple Shareholders Shouldn’t Worry After Selling Earnings

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If you’re an Apple shareholder and wondered after last week’s stellar earnings report why your stock is going down rather than up, the reason given – that chip shortages will affect the short-term outlook – may not sound good enough. For the trader looking at every short-term opportunity to move portfolio funds to where their next quick profit is likely to be, nothing more than a “sell in the news” heading is required. Long-term investors, though, may want to consider a recent fact about the company and the negative headlines: Apple has beaten pretty much every short-term “sell” title in recent years on its way to becoming a $2 trillion company. .

Trump’s trade war with China? no problem. The sudden decision to stop providing guidance for the iPhone unit? Much ado about nothing as the iPhone super-cycle popped up anyway. As for the global shortage of semiconductor chips now cited by Apple, it might be wise to keep in mind that Apple has a long history of being very conservative with its forecasts – the official earnings guidance is still no longer. And one more thing: Tim Cook was promoted to CEO after Steve Jobs based on his mastery of global logistics.

“Let’s face it, if Apple ever had any trouble getting chips, every other company on the planet would have 10 times as much trouble,” said Nick Colas, co-founder of DataTrek Research. “If you’re really concerned about the supply of chips, you want to own Apple because it’s number one in every chip manufacturing piece.”

But there’s a bigger question for Apple and the rest of the market: How strong is the next phase of market growth?

People visit the Apple Store at the Oculus Mall in Manhattan on July 29, 2021 in New York City. Several stores in the mall, including an Apple Store, have asked guests to start wearing masks again as the Delta type of Covid spreads through New York City.

Spencer Platt | Getty Images News | Getty Images

The immediate market outlook does not necessarily mean buying on the dip after big tech sell-offs on the news, according to Colas. Seasonality is an immediate risk, as market history shows that the early August period is volatile relative to the VIX volatility index.

“It’s a valid trade question, where is the dollar’s trading heading in August,” Colas said.

Short term trading vs long term investment

Since 1990, the early August period has been the period when VIX reached its peak. Part of the reason is the lighter trading volumes in the market during the summer. He said, “It represents the lowest level of liquidity, when people are on vacation… Fewer people are trading and more volatility is carried by any news. I am asking clients to be careful.”

On Wednesday through Friday last week, the S&P 500 traded volume was below its 30-day average.

For the short-term trader, rotating away from the leaders of large companies to the small capitals represented by Russell 2000, which Colas has described as “oversold” since his hot streak in early 2021, might make sense. “The beanie hats went through equivalently during March and April and haven’t worked since then because they’ve progressed so much,” he said.

That makes it, statistically at least, based on 100-day-delayed returns, cheap at the moment.

But for investors who don’t exercise the market for a quick trade, Colas says disappointing deals after earnings from Apple, Facebook and Microsoft shouldn’t be too heavy. Amazon was actually the most anomaly in terms of losing revenue forecasts rather than posting a big win, making the news sale a “fair” reaction, according to Colas.

Big tech stocks were already bidding in Q2 reports

It’s also important to remember that big cadences from the rest of the big tech companies were already embedded in most stocks as June and July were strong based on guessing the market correctly – that Q2 earnings will be excellent. “The market has been bidding for names in the quarter. The market caught the surprise and it all happened, and when you see all the shares go up to quarterly earnings, it’s hard to sustain that. That is ‘selling in the news’ unless there’s a massive amount of Good news and guidance.” “This is normal behavior for capital markets.”

It goes back to an important data point in assessing the strength of these companies: They have doubled the strength of their earnings in the past two years. “This is amazing,” he said. This gives him more comfort in the long-term picture. “I don’t see any change. Big tech is still the place to be.”

Two reasons were cited.

Even with these companies’ earnings growth doubling, he doesn’t think they’re close to peak earnings. “It’s just a much higher base on which to build.”

Second, these companies have specific advantages in industries and do not directly compete with each other in a zero-sum game in many areas of strength.

These companies have increased their profits a lot because the pandemic has changed consumption patterns, made us all more focused on technology, and the market made a lot of money betting on it just as it happened. But the big question now for big tech isn’t about threatening its dominance – though many antitrust battles loom – it’s just how much room they have to keep earnings growth high.

“Tell me what would you pay a company with 30% ROI and 10% to 15% structural growth and could do that for a decade? What’s the multiplier? Is it 30x or 40x? No idea,” Colas said, “But I know. It’s not 20 times.”

Growth after the epidemic peak and the highest profits

Apple was an example of this set of concerns about price-to-earnings multiples. It lags behind the rest of the tech giants for years, seen as a hardware vendor and weighed down by that market view until the services business surged through the pandemic and the company was given a $2 trillion market cap. And again this year, he was the “eccentric redneck,” Colas puts it, with annual dividend yields of roughly 10% versus about 30% for Facebook and Microsoft.

Apple pulled back on the S&P 500 as well ahead of earnings. One reason: it sucked up a lot of demand, and futures investors are rightly concerned that posting good profits will become more difficult. But Colas said that could also mean it has the most room left to go up, even in the short term as new iPhone launches in the fall and back to school boost consumer tech spending.

The story of the broader global growth to which the entire stock market is linked is not closed. In fact, amid the inflation panic earlier this year and expectations that the 10-year Treasury yield would rise, it did the opposite. “The market fully understood that growth peaked in the first quarter and started to trend lower towards the end of the quarter,” Colas said.

The price story was wrong, but slower economic growth is now higher on investors’ list of concerns in a US market where P/E ratios are high. Big tech accounts for 23% of the S&P 500 and that means whatever the market decides next about its high valuations will affect US stocks in general.

No big tech company is nearing its peak earnings on an absolute basis.

Nick Colas, co-founder of DataTrek Research

But investors don’t have many great options globally. With the situation in China between the government and its leading companies taking a heavy toll in recent weeks, there may be business opportunities, but emerging markets are no place for anything but trade. And even if there is a potential opportunity in other international plays like European finance, it will take time for prices to move in a direction that benefits those stocks.

“What’s left? It’s the United States and at the head of the cover table,” Colas said. “That’s what you need to own. You still go back to the same names.”

Looking at sector weights going back to the 1970s and through the 1990s, he says there was never a time when five companies had more weight. “It’s only five names, and it wasn’t like Exxon was at its peak in S&P. It was a commodity game. These companies have huge barriers to entry and very high structural returns.”

Even with these advantages, trying to figure out the strength of their earnings after the pandemic, or at least when the world moves from the worst of the pandemic to the lasting effects, is the bigger issue for big tech.

“What is the fair growth rate for 2022? That’s tough,” Colas said.

For Alphabet — the only company among the big tech names reporting last week that surged after its earnings — and for Facebook, which reiterated an earlier warning of slowing revenue growth, there’s the cyclical nature of the advertising market to count on, and that hasn’t changed all that much in the past. recent decades. Apple is more challenging though, because while it has made progress beyond the iPhone story and building its services business into a huge growth engine, a lot of the hardware demand has been pulled forward.

For Amazon, Colas noted that e-commerce’s share of demand was from 17% to 24% in the second quarter of 2020, then declines to 20%. And every percentage point in that range has a huge impact on Amazon’s business model — in fact, he cited as the reason Amazon was “stuck in that group” for nine months before it collected its profits. From October 2020 to June of this year, Amazon rebounded but was not lifted like other names until the pre-earnings run. Year-to-date after its earnings plunge, the stock is barely holding out for gains, just under 3%.

What just happened in all of these stocks, Colas said, was peak earnings, but it’s nowhere near peak earnings for these companies. The concept of peak earnings, which has been a concern for investors, indicates that there comes a point in the cycle when a company shows the highest earnings growth in absolute terms. “This is the topic of peak earnings, and no big tech company approaches peak earnings on an absolute basis,” Colas said. “Because they keep growing and the amount of leverage their earnings have is huge.”

This is likely to be a future buy after the sell-off ends in the news.

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