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:
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.
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.
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.)