With second-quarter-earnings season fast approaching, Wall Street analysts are rushing to chop price targets, earnings estimates and in some cases stock ratings ahead of what could be a difficult period for technology shares.
The toxic brew of soaring inflation, higher interest rates, softening consumer demand, unfavorable currency-exchange rates, ongoing component shortages, the lingering effects of the pandemic on Chinese electronics manufacturers, and increasing concerns about an imminent recession are hitting every corner of the technology world—chips, software, hardware, and e-commerce. It is an issue for both small and large businesses, for consumer-facing companies and those that serve enterprise customers.
The Street has taken to cutting their views on tech stocks in batches, in a top-down approach that focuses on macro risks, rather than individual stock issues. On Thursday, that trend was clear, as estimates and targets moved lower for hardware, internet, online travel, and software stocks. Here’s a quick rundown on some of the latest cautionary comments.
Software: Morgan Stanley software analyst Keith Weiss cut revenue estimates for the stocks in his coverage universe on average by 1% for this year and 3% for 2023, while lowering price targets across the group, citing “increased evidence” of slowing demand. “Despite compression in software-as-service valuations, with the average stock down 40% year-to-date, investors remains skeptical to jump back in. Why? Multiples appear de-risked, but estimates have yet to be reset and we are just beginning to see cracks emerge in demand,” he writes.
Weiss sees evidence of elongating sales cycles, particularly for companies focused on small-and-medium-sized customers. Earlier this week,
(ticker: NOW) shares fell sharply after CEO Bill McDermott said in an interview on CNBC that the company is seeing lengthening sales cycles in Europe.
Weiss cut target prices on 16 stocks, a group that includes ServiceNow,
(GDDY) and ZoomInfo Technologies (ZI), among others.
Hardware: J.P. Morgan hardware and networking analyst Samik Chatterjee writes in a research note that he is “taking a defensive stance” on his stocks given growing signs that the challenging macro environment is affecting demand.
Chatterjee recommends investors move away from companies with exposure to enterprise spending, and shift to companies serving cloud and telco providers. Chatterjee cut revenue and profit estimates across his coverage universe by 2% for this year and 3% for next year. Among other factors, he points to flat auto production in 2023, an expected 10% drop in telco spending, cable and broadband capital spending “moderating but resilient,” and “positive and robust” spending by cloud providers. And he notes that consumer spending looks weak on autos, PCs, smartphones, and TVs.
Chatterjee cut his ratings on
(CSCO), F5 (FFIV) and
(TEL) to Neutral from Overweight, while upping his stance on Juniper (JNPR),
(APH) to Overweight from Neutral. The analyst cut his target prices on two dozen hardware stocks, including Dell (DELL),
(GLW), Qualcomm (QCOM), Cisco,
“Tangible reductions to enterprise spending have been limited to date, but there is evidence of hesitation from customers in evaluating spend for the next 12-18 months,” he writes, adding “we believe the bigger dynamic for enterprise suppliers will be material order moderation from both tough compares and re-evaluation of spending, which in the case of certain companies can drive orders to even decline year-over-year.”
Internet: Citi analyst Ronald Josey is the latest analyst to cut his targets and estimates on the internet sector—his cuts affect
(AMZN). He maintains Buy ratings on all of those stocks, but is trimming his models to reflect “increased macroeconomic headwinds” and unfavorable foreign exchange rates. “Our conversations with advertisers suggest a fluid environment,” he writes, adding that his focus in the coming earnings period will include consumer demand trends, engagement trends in short-form video, and “overall cost and organizational efficiencies.”
Travel: Truist analyst Naved Khan writes that data suggest we’re having a robust summer travel season, but he sees mounting risks for online-travel-agency stocks in 2023, amid growing signs of economic weakness. He also sees the companies as vulnerable to unfavorable currency trends. Khan cut his target prices and estimates for
(TRVG) and Airbnb (ABNB), although he says that both Booking and Expedia are attractively valued, near the low end of their 10-year average valuation as a multiple of Ebitda, or earnings before interest, taxes, depreciation, and amortization.
Most technology stocks are trading lower on Thursday, with the