The article was written exclusively for Investing.com
It has been two busy weeks of making money – companies like Netflix (NASDAQ :), Apple (NASDAQ :), Advanced Micro Devices (NASDAQ :), and Facebook (NASDAQ 🙂 all reporting results. There may be a common theme that the majority of these companies share. Despite having achieved excellent results, they are struggling to move forward.
There is one more thing they all have in common: They were all big winners in 2020 and were part of the stay-at-home trade as that trade may near the end of its life cycle. In some cases, the conference calls showed that more difficult comparisons can make 2021 a more challenging year. It could also mean that the multiple expansion that these stocks have undergone as a result of accelerating growth leads to a period of stagnation or contraction.
Tough Comps
After their much better than expected earnings and earnings, both and fell, much to the surprise of some investors. But the conference calls revealed the reasons for this underperformance. Apple noted that year-on-year growth in the Wearables, Home and Accessories category will slow compared to the fiscal first quarter. It also noted that its services business will face difficult comparisons when reporting its March quarter. Facebook, on the other hand, indicated that investors could see stable or moderate ad revenue growth in the first half of the year, followed by weaker growth rates in the second half.
Even more clearly, don't be surprised if future growth doesn't live up to the immense expectations priced into the stock.
No Margin Expansion
AMD also delivered a massive blow and provided equal guidance; nevertheless, shares have fallen by about 8%. However, despite strong demand for its chips, the company did not generate an improvement in its margin from the same period a year ago. The lack of margin improvement in an environment where the company is experiencing strong revenue growth may indicate that they cannot get higher prices for their chips. It may also mean that future earnings expectations have to be adjusted downwards.
Even Netflix fell victim to this trend, with inventory up nearly 20% the day after the eruption results. With net subscriber gains much higher than expected and with a positive outlook for free cash flow. But since January 20, the stock has returned almost all of its gains, dropping as much as 9% and down as much as 13.5%.
Is The Tide Going Out?
The market seems to be sending a message that the better than expected results are not enough to keep these stocks at higher prices.
In fact, this is the second quarter in a row that this has happened. All four stocks have not made meaningful progress since early September.
The exact message the market is sending is not clear. Still, it seems to indicate that the companies are not as likely to see the significant sales and profit growth that they benefited from at the start of the pandemic. That could later translate into slower growth rates, and if it does, it could be difficult for investors to justify the current valuations of these stocks.
For example, Apple is trading approximately 30 times its estimated fiscal year 2023 profit of $ 4.67. That is the highest PE multiple dating back to the year 2007. It is also almost double the average PE ratio of 15 at the time.
Apple P / E
The recent slump in some of these major technology stocks may signal the market that a shift is occurring. And that shift can lead to heavier prices, lower multiples, and perhaps lower prices.
Disclaimer: Michael Kramer and Mott Capital Management clients own shares in Apple. Mott Capital Management, LLC is a registered investment advisor. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of specific securities, investments, or investment strategies. Investments involve risks and, unless stated otherwise, are not guaranteed. Be sure to consult with a qualified financial advisor and / or tax professional before implementing any strategy discussed herein. Upon request, the consultant will provide a list of all recommendations made in the past 12 months. Past performance is not an indication of future results.
