Microsoft
MSFT
, Apple
AAPL
, Alphabet
GOOGL
and Facebook
FB
are so big that the four of them together have a significant influence on the overall technology sector performance numbers. Amazon
AMZN
is spoken of in the same breath because it’s really a technology company with a platform for retail and another for enterprise. But technically, it sells goods and services, so it has to be grouped under retail.
Whatever be the case,
these five companies
account for 16.9% of the total market capitalization of the S&P 500 index, down from 17.4% of the total in October last year, but still second only to the Technology sector’s weight in the index at 31.4% and above the other 15 sectors.
So when they generated 21.1% earnings growth on 19.1% revenue growth in 2020, it was enough to pull up the S&P 500 to average revenue and earnings declines of 1.7% and 13.1%, respectively.
As of Apr 23, these five companies were expected to generate revenue and earnings growth of 13.7% and 15.6%, respectively in 2021.
But while the big four do have an outsized impact on the sector’s performance, it doesn’t mean that there are no others aspiring to reach the same position. Nor does it mean that there are no steady players in the space that keep doing their job quarter upon quarter upon quarter. And delivering on their promises.
That’s why it makes sense to take a look at all three types, through their earnings performances in the recently concluded quarter.
Microsoft Corp (MSFT)
: The company has a really huge and sprawling business, such that highlighting its different segments is like discussing so many different companies. Particularly when they have all done rather well.
But overall, Microsoft reported revenues that exceeded the Zacks Consensus Estimate by 1.9% and per share earnings that exceeded by 10.8%. As companies raced to add digital capacity so they could continue to operate with a remote workforce, Microsoft was able to leverage the relationships built selling legacy products.
That’s what brought the 13% increase in productivity revenue (including 21% growth in commercial Office 365, 39% growth in Dynamics 365, 23% growth in LinkedIn); 23% increase in intelligent cloud revenue (including 50% growth in Azure); and 14% growth in personal computing (including 40% increase in Xbox content and services).
Going forward, Microsoft will benefit from an increasing number of SMBs increasing their spending versus last year. With the economy coming out of the blues, advertising will also benefit, leading to another strong quarter for LinkedIn. The strength in Azure will continue as customers consume more services. The work from home trend is expected to continue, leading to softness in on-premise productivity and moderate growth in on-premise servers.
There doesn’t seem to be a good reason for the post-earnings selloff. While some profit-taking may have driven investors and a valuation of 32.98X may not look cheap, Microsoft is not your average stock on the street. The company has tremendous earnings power, a huge cash engine and deep technology. Its earnings estimates are headed for a revision and my guess is they will move upward.
The shares carry a Zacks Rank #2 (Buy). Currently, the Zacks Consensus Estimates for revenue represents 14.6% growth this fiscal year (ending June) followed by 10.2% growth in the next. The earnings estimates for 2021 and 2022 represent growth of 28.0% and 9.4%, respectively.
Advanced Micro Devices
AMD
: President and CEO Lisa Su summed up the quarter well: “Our business continued to accelerate in the first quarter driven by the best product portfolio in our history, strong execution and robust market demand.”
Its Ryzen processor enabled expansion into premium products over the last couple of years that led to revenue share gains in the ultrathin, gaming and commercial segments of computing, tripling its commercial notebook design wins with the largest OEMs this year. Its Radeon GPUs did the honors on the graphics side.
The performance-per-watt gains of the third generation EPYC processors spurred deployment in both the data center and cloud. All this led to 46% growth in the Computing and Graphics segment and 286% growth in the Enterprise, Embedded and Semi-Custom segment. Considering the data center woes Intel highlighted on its earnings call, AMD appears to have taken share from the company.
As far as supply constraints and component cost increases are concerned, Su said that the company has been able to manage that so far. AMD also works closely with suppliers that has enabled it to identify some supply constraints in substrates that it is working to address. Management is confident that AMD will have the components necessary to generate the 47% growth forecasted for this year.
At 40.3X earnings, the shares might not look cheap. But it’s worth remembering that AMD is trading at the low end of its annual range and the growth outlook continues to improve, justifying strong multiples.
The shares carry a Zacks Rank #2. Currently, the Zacks Consensus Estimates for revenue represents 38.5% growth this fiscal year followed by 14.3% growth in the next. The earnings estimates for 2021 and 2022 represent growth of 51.2% and 26.4%, respectively.
Texas Instruments Inc.
TXN
: Texas Instruments is one of those companies that manages to beat estimates quarter upon quarter by efficient execution of a superb operating model and prudent manufacturing strategy (the last time it missed estimates was in Apr 2015).
This past quarter was no different as the company made the most of strengthening demand in the industrial, automotive and personal electronics markets. As a result, it saw steady mid-single-digits revenue growth across all its segments, generated steady cash flow, some of which it also returned to shareholders through dividends and share repurchases. It also provided encouraging second-quarter revenue and earnings guidance that were well above the respective Zacks Consensus Estimates.
At 27.37X earnings, TXN is one of the more reasonably valued tech companies. Moreover, the valuation is also close to its median value over the past year.
The share carry a Zacks Rank #2. Current estimates that should soon be raised represent 15.6% revenue growth in 2021 followed by 4.9% growth in 2022. Earnings are currently expected to grow 13.4% and 8.1%, respectively.
Year-to-Date Price Performance
Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report