By Therese Poletti, MarketWatch
Computer hardware and devices is another area of a story with two sides. While many devices, such as PCs, laptops and printers, are in demand as more employees buy additional equipment to work from home every day, the electronics supply chain had a big disruption in the first quarter. PC shipments fell 9.8% in the first quarter, according to IDC, due to supply chain issues, such as temporarily shuttered manufacturing lines.
Overall, the hardware and peripheral sector will see earnings drop of about 8%, according to FactSet, pulled down by HP Inc. /zigman2/quotes/203461582/composite HPQ -2.61% , corporate-computing sibling Hewlett Packard Enterprise Co. /zigman2/quotes/201998588/composite HPE -1.20% and Apple Inc. /zigman2/quotes/202934861/composite AAPL +2.16% /zigman2/quotes/202934861/composite AAPL +2.16% The second quarter, at least for now, is expected to see a slight rebound, with earnings expected to fall 1.4%, as manufacturing has come back, but with nearly every company removing their guidance, it’s fair to say that all estimates will be in flux.
/zigman2/quotes/202934861/composite AAPL +2.16% Normally the big star of tech hardware, Apple has had an especially scary start to the new year, with several weeks of manufacturing facilities shut down in China during the onset of the coronavirus. Its retail stores, outside of China, are now closed at least through May. Wells Fargo analyst Aaron Rakers has already called Apple’s March quarter “a throw away quarter.”
Apple in the age of COVID-19: Can new iPhones be made, and who will buy them?
The second quarter is expected to see some improvement, with demand in China returning as the country has contained the virus and starts to return to work, and Apple reopening its retail stores there in mid March. Apple did an unprecedented launch of its second generation, lower-priced iPhone SE via a news release, but most analysts don’t expect consumers to upgrade their phones on a whim right now, although the budget price of $399 may be appealing to consumers who are in major need a new phone.
“In China, iPhone demand is rebounding significantly,” Ives said in an interview. “But in the U.S., the average consumer is focused on getting groceries and hand sanitizer.”
Ives and a few other analysts now expect Apple’s much anticipated 5G iPhone fall launch until the end of the year, pushing out that expected revenue to calendar 2021. Ives noted that Apple has “one shot” at its first 5G launch, “and tepid success out of the gates due to a lukewarm consumer appetite would be a disaster scenario.”
For the first quarter, chip makers did remarkably well considering the global manufacturing issues, with a few standouts such as Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -0.15% and Intel Corp. /zigman2/quotes/203649727/composite INTC -0.25% , thanks to a surge in purchases of notebooks and more servers for data centers to expand cloud computing capabilities.
Earnings for semiconductor makers and equipment makers will, on a blended basis, rise 5% in the first quarter, according to FactSet, while second quarter will see slight growth of 3.3%. AMD is expected to have the strongest earnings gains in the bunch, and CEO Lisa Su said in an update about COVID-19 on the company’s website this week that AMD was maintaining a “robust global supply chain” and that it was currently supplying high-performance computing and graphics products “with minimal disruption.”
Semiconductors in the age of COVID-19: Click for more on Intel and Advanced Micro Devices
Eric Ross, an analyst at Cascend Securities, said that a big spike in laptop demand will also benefit Micron Technology Inc. /zigman2/quotes/205710729/composite MU +0.97% , which makes memory chips, and Nvidia Corp.’s /zigman2/quotes/200467500/composite NVDA +0.83% graphics processors for high performance computing and gaming. Nvidia will also benefit by investments in more servers for data centers.
But on the other side, it’s not clear how long this demand will last for chip makers, and the second half could be a big disappointment after the surge of purchasing.
“These industries are the most prone to expected lower consumer spending ahead,” Stovall of CFRA said.
The cloud is probably the biggest beneficiary of the pandemic, as companies are forced to offer some kind of cloud — either private or public — with computing resources for their employees. One company seeing huge demand from both consumers and business but also faces its own issues is Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.62% /zigman2/quotes/210331248/composite AMZN +0.62% , because of higher costs associated with the pandemic.
/zigman2/quotes/210331248/composite AMZN +0.62% Amazon is seeing a massive spike in e-commerce, as it is a major lifeline to the outside world for deliveries of much needed goods. But it has higher costs with the increase in demand for deliveries and employees, who risk exposure working in warehouses and delivering products. Baird’s Sebastian raised his revenue estimates for Amazon’s first and second quarter and trimmed profit estimates below the consensus, saying that he was “balancing strong consumer e-commerce trends with recent logistical challenges and added headcount.”
Even so, Amazon remains one of the most uniquely situated to benefit from so many aspects of the coronavirus with everyone at home: its Whole Foods Grocery unit, Prime streaming service and its AWS cloud computing services are all in huge demand right now.
Amazon’s biggest rival in the cloud, Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +0.23% is also seeing a surge for its Azure cloud services, and it has been also touting its new Teams service as a rival to the collaboration software from Slack Technologies Inc. /zigman2/quotes/212180539/composite WORK +1.01% . But within its cloud business, Microsoft lumps in revenue for sales to servers and other IT products in its “Intelligent Cloud” segment and its legacy Windows business will continue to drag down the PC business, where analysts have lowered their expectations for in the last couple of months.
Cloud-computing giants in the age of COVID-19: Click for more on Amazon and Microsoft
Ives of Wedbush remains the most bullish on the cloud sector among the tech crowd, even amid the economic uncertainty . Wedbush even recently partnered to create a pure-play cloud ETF made up of small- to medium-cap cloud-computing stocks with the ticker IVES.
But the next few quarters for tech investors are going to be tough for investors, he said, while they deal with the confusing elements of how the virus is effecting companies.
“There is a disconnect between the near-term fundamentals and what the stocks are going to do,” he said, predicting the next few quarters will have companies ratcheting down expectations and numbers coming down across the board.
“There is not one investor not looking for numbers to be cut and guidance to be taken off the table,” he said.