By Therese Poletti
The typically robust holiday season is going to be tough this year for many consumer-focused tech companies, but here’s what investors need to know before adding to their wish lists for Santa.
Typically the biggest quarter of the year for many companies, the December quarter will see slower growth and possibly some disappointments for many consumer tech companies. It will also show which companies have the strength to power through major supply-chain problems, and why selling tech to businesses instead of just consumers is always helpful.
Disappointing forecasts from Peloton Interactive Inc. /zigman2/quotes/208035743/composite PTON -23.93% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -2.96% , Apple Inc. /zigman2/quotes/202934861/composite AAPL -1.03% and others so far during earnings season indicate that the pandemic boom may be ending for many consumer-focused companies. Even if demand is still strong, continuing supply-chain constraints will likely effect those with normal, seasonal demand.
Don’t be too scared off of some of the big names, though, because they have the size to work through the supply-chain issues. In Apple’s case, the behemoth was still not willing to give a revenue forecast after component shortages lead to a $6 billion revenue shortfall in the September quarter, but did say component shortages will be an even bigger factor in its December quarter. But demand for Apple’s products, especially its new iPhone 13, is not going anywhere, especially as 5G networks become more pervasive, so any revenue that doesn’t show up in the holidays quarter is likely just pushed back into next year, which could help sustain the company through lighter quarters early in 2022.
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Communications chip designer Qualcomm Inc. /zigman2/quotes/206679220/composite QCOM -3.46% told analysts that it was able to work through its supply issues in the September quarter, even as it faces supply constraints across the board.
“We saw this coming early and we’ve been talking about it for the last couple quarters, and we have put in place plans both for dual sourcing for certain parts,” Qualcomm Chief Financial Officer Akash Palkhiwala told analysts.
Some smaller or younger tech companies cannot be as confident about the long-term demand, as evidenced by smaller radio-frequency chip makers than Qualcomm, including Qorvo Inc. /zigman2/quotes/209919828/composite QRVO -3.20% , suggesting less confidence in the holiday quarter. Confidence should also be weak for companies that were on the receiving end of the pandemic fueled stay-at-home boom. As more consumers get vaccinated and start spending time outside or at gyms, movie theaters, and other places previously closed, companies like Peloton and streaming services are seeing growth sharply decelerate.
Peloton may be the canary in the coal mine calling out the end of that pandemic boom for many companies that saw earnings and stocks soar with hefty double digit growth rates. Peloton revised its forecast for annual revenue to a range of $4.4 billion to $4.8 billion, down $600 million to $1 billion from Wall Street’s prior expectations. Since that bombshell, Peloton has seen its shares plummet around 40%.
“Coming out of COVID, consumer behavior and supply chain inputs have been very challenging to predict in the short-term, as clearly evidenced by our new outlook,” Peleton co-founder and Chief Executive John Foley told analysts in the company’s earnings call last week. Jill Woodworth, its CFO was even more blunt , stating that it “underestimated the reopening impact on our company and the overall industry.”
Roku Inc. /zigman2/quotes/205087179/composite ROKU +0.52% , saw a slowdown in new accounts, as well as sales of its video-streaming gear fall year over year, compared with an “extraordinary demand spike in the pandemic” in the third quarter of 2020. Roku also highlighted ongoing challenges from component cost increases, inventory constraints, shipping delays and cost increases, all of which are expected to continue into the fourth quarter. It still sees fourth quarter revenue growth of 37%, but that is down from revenue growth of 58% growth in the same quarter a year ago.
“There’s a lot of uncertainties around the holiday season,” Roku Chief Financial Officer Steve Louden said.
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Netflix Inc. /zigman2/quotes/202353025/composite NFLX -1.48% is also seeing slower growth in its new subscribers, as many viewers are now spending less time in front of their streaming devices at home. For the fourth quarter, Netflix forecast that it expects 8.4 million new subscribers, compared with 8.5 million in the same quarter a year ago. Even this slightly lower growth though, may be tough to achieve, after third quarter new subscriber adds came in at 4.4 million.
One anomaly is GoPro Inc. /zigman2/quotes/209165587/composite GPRO -5.36% , which believes it will be able to meet its full year targets even if supply constraints limit the upside, promising that its website and retail partners “will be stocked and ready for shoppers this holiday season.” Based on the missed holiday forecasts and other disappointments in the action camera company’s past , however, it’s worth questioning whether executives are being overly optimistic.
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Safer bets as we head into the new year with more offices opening up to their employees may be with companies that focus on corporate customers, or on large companies diversified enough to buttress weaknesses in their consumer business.
“Projected growth rates for the fourth quarter in tech, based on consensus estimates, are showing less growth,” said Daniel Morgan, a portfolio manager at Synovus Trust which owns most of the companies in this column in its funds. “However in software, we are still looking for an acceleration.”
Morgan noted that IT managers are closing down their projects before the end of the year, and that money is going to be spent. According to FactSet, the information technology (IT) sector of the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.10% is forecast to see blended revenue growth of 10.6% in the fourth quarter, compared with growth of 11.49% a year ago. Software and semiconductors will again be the stars, with revenue growth of 16% and 15%, respectively, for the fourth quarter.
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Two of the biggest winners of the earnings season so far have been Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -0.57% and Alphabet Inc. /zigman2/quotes/205453964/composite GOOG -1.58% /zigman2/quotes/202490156/composite GOOGL -1.34% , diversified tech companies that have seen steady performance and results throughout the pandemic. Microsoft is in both the consumer PC business, corporate enterprise software and it has a fast growing cloud business, Azure, that is the second largest cloud provider after Amazon’s AWS.
Alphabet’s Google ad business had the best growth of the internet companies in the third quarter , thanks to its continued usage on PCs and Android phones, while many social media and internet companies suffered from the changes to Apple’s iOS on the iPhone, that let users reset privacy settings to block tracking by advertisers. Alphabet executives also said Google’s next Pixel smartphone, the Pixel 6, is getting great reception since its recent launch, designed around the company’s first chip, called Tensor, with built-in artificial intelligence capabilities.
“If you really prospered during COVID, you are probably not doing as well this year,” Morgan said. “Some companies are able to deliver regardless. Microsoft and Google are in that category.”
The way the current economic shift may be to look for safety in companies that have diversified into enterprise software, but include some of the consumer-focused names, if they get cheap enough. Keep an eye on the long term and don’t focus too much on companies that could see their demand change radically based on current trends.