Today's negative pre-announcement from Cirrus Logic (CRUS) adds to the cloudy outlook for Apple (AAPL). In many ways, Apple's problems are very company-specific: a function of competitors are finally catching up to it. Apple's smart-phones and tablets no longer have the field to themselves. What this means is that Apple's growth outlook is a lot less certain than was previously believed.
We will know more about Apple's earnings picture as the company reports Q1 results after the close on April 23rd. But the current Zacks Consensus estimate for Q1 is down almost 14% in the last three months and estimates for the coming quarters likely have more room to come down. In terms of growth, Apple's total Q1 earnings are expected to be down roughly -16% from the same period last year.
The Key Trends
Apple's problems may be company specific, but plenty of its hitherto high-flying Technology peers are faced with similar earnings challenges. We saw in Intel's (INTC) earnings report on Tuesday how the weak PC demand picture is weighing on its outlook.
The situation isn't much different for other PC centric players like Hewlett-Packard (HPQ), Dell (DELL), Microsoft (MSFT) and Advanced Micro Devices (AMD), to name just a few. Ironically, Apple played a leading role in bringing the PC market to its knees.
Others are faced with different headwinds that lead to the same earnigns challenges. Companies with advertizing based business models like Google (GOOG), Facebook (FB), Yahoo (YHOO) and others are struggling with monetizing the secular shift from PC to mobile devices. This platform shift has material consequences for these companies' margins, as do the headwinds facing Apple and the PC players.
Expectations for Q1
These trends are clearly visible in the aggregate earnings expectations for the sector. And let's not forget, Technology is the lagest earnigns contributor to the S&P 500. It's not without basis to say that 'as goes Tech, so goes the S&P 500.' Total earnings for the sector are expected to be down -8% from the same period last year, which is a big contributor to the expected -1.6% decline for the S&P 500 as whole.
The revenue picture isn't that bad, with total sector revenues in Q1 expected to be up +2.8%. And this spotlights the margin problem we referred to earlier for the individual companies. Net margins for the sector in Q1 are expected to be down more than 200 basis points from the same period last year and essentially flat from the preceding quarter.
What About Beyond Q1?
In terms of earnigns, the first and third quarters are typically the seasonally weak periods for the sector. As such, the market may be willing to cut the Tech companies some slack for a weak showing this reporting season. But a lot will depend on how they guide towards the coming quarters, as expectations for the coming quarters, particularly the second half of the year, are for a resumption of strong growth.