Looking Beyond China’s Slump to Tech Earnings

Amid all the tumult that surrounds stocks — and specifically tech stocks — China and the yuan devaluation, and whether that country’s growth is real, as reported, or heavily doctored, something perhaps equally important is coming down the pike, and fast.

Earnings season.

Numbers — both historical, and forward looking, and perhaps crucially — commentary regarding China and the rest of the world will be parsed with renewed vigor in a market where the tech-heavy NASDAQ has touched correction territory. Following the 2015 performance, where the index outperformed peers, up about 5.7 percent on the year, the question remains whether the sector has been overvalued, and whether there’s succor to be had in individual stock picking.

Later this month, amid the geopolitical concerns dominating the Middle East, China’s well-publicized struggles, and oil’s seemingly unstoppable slide, companies will offer snapshots of their own triumphs and travails, on a product by product basis, and this can help investors separate themselves from the huge trends that are afoot and that may be painting, well, everything, with a broad brush of panic.

Tech earnings taken as a whole are slated to drop by mid-single digits for the fourth quarter of last year.  That comes with an attendant low single digit sales gain, according to consensus estimates.  That disconnect implies that costs continue to weigh on margins, most notably wages – and the latest payroll data, with hiring chugging along, speaks to a continuation of that trend.

Yes, Apple touched recent 52 week lows on iPhone worries.  Yes, Alibaba and others with China exposure are getting hammered.  But looking beyond those behemoths, which certainly make for good copy in the financial trades…

Samsung just posted earnings results that fell short of expectations, with sales that were anemic over the holiday season.  Sales at 53 trillion won were basically the same as a year earlier, and net income will be forthcoming post audits later in January. Components may remain pressured, but also, smartphone demand is likely to keep slowing.  That has an eventual read across to payments – in that fewer devices in the field may mean less uptake of mobile payments. 

What to look for in a stock picker’s market?  Insulation – especially as valuations remain high for companies like Amazon, with triple digit price to earnings ratios.  The best way to find a stock that can weather the bumps in the road tied to macro concerns is to find companies that have a product niche that is disruptive.

That speaks well, eventually, for FinTech, in terms of innovation and the backstop that is emerging with continued tie ups with banks with deep pockets.  Eventually that may be enough to bring investors to look again at companies like OnDeck Capital.


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