The Nasdaq has fallen roughly 8% since March 30, to outperform the S&P 500 early in the second quarter as the tech-heavy index is inches from its highs just a month after a correction. The decline from mid-February highs coincided with a wave of bond sales and some technology stocks feared on Wall Street were the result of a huge downturn.
How quickly things change. The Nasdaq has made up roughly all of its losses, which may have been more about profit-taking than a real shift in fundamentals and fears of inflation. It also turns out that part of the bond sales that led to a spike in US Treasury bond yields were driven in part by Japanese banks and insurers trying to secure returns for the end of their fiscal year.
Obviously, if the vaccine surge continues and the US economy reopens, there are real concerns about the possibility of prices rising. But inflation worries have not been fulfilled for years and bond yields have fallen recently.
The bull’s argument for the market and the economy is a difficult current right now. The economic reopening, coupled with pent-up demand, leads economists to predict that US GDP will grow 6% or more in 2021, the strongest expansion in over 30 years.
Meanwhile, the US government has pumped trillions of dollars into the economy with plans for more. The Fed is also keen to maintain its simple monetary policy for the foreseeable future, and changing its preventative approach means rates could stay low even if the economic recovery really heats up.
Additionally, government bond yields are historically low considering the 10-year yield rose over 3% in 2018 and over 5% in 2006 – it’s currently at 1.59%. This means Wall Street will have to keep looking for returns.
Additionally, Goldman Sachs GS, JPMorgan Chase JPM and others released blowout results to kick off first quarter earnings season. JPM CEO Jamie Dimon recently said the economic boom could continue until 2023. And despite the recent strength of finance, energy, and other sectors linked to the business cycle, technology remains likely the best long-term investment out there (see also: Big banks hint at the picture of improving results in 2021).
Let’s take a look at two of the world’s largest tech companies ahead of their upcoming financial releases to help investors decide whether to buy MSFT or AAPL when the Nasdaq storms back early in the second quarter and the S&P hits 500 records.
Microsoft MSFT Third Quarter Fiscal Year 21 results on Tuesday April 27th
MSFT is up 11% since the end of March to set new records. We’ll be on the rise soon, but let’s dive into Microsoft’s growing portfolio first. The company announced on April 12 that it had agreed to buy Nuance Communications Inc. NUAN for $ 16 billion. This makes it the second largest business under CEO Satya Nadella – MSFT paid $ 26 billion for LinkedIn in 2016.
Nuance is a leader in speech recognition and AI technology, with clients in finance and other sectors. The offering has also become popular in the healthcare sector, where more and more doctors are dictating patient notes digitally and want to do a lot more with artificial intelligence. Nuance’s speech recognition and technology will be integrated with Microsoft’s booming cloud business for customers in healthcare and beyond.
The Nuance deal helps MSFT challenge others in the world of speech recognition and is likely to play an important role in the future as the industry competes for efficiency and mass digitization. The ability to make strategic acquisitions both large and small has helped the historic tech company diversify and grow, and the Spree is unlikely to end.
Microsoft’s ability to grow its cloud business over the past several years alongside Amazon AMZN and others has changed the outlook for the tech icon. The cloud plays a role across the enterprise, from Azure to Office, Xbox to remote work and beyond. The company’s commercial cloud revenue increased 34% to 40% of total revenue in the second quarter. Total revenue increased 17%, which is in line with our forecast of 9%.
Zacks estimates that MSFT’s adjusted EPS will increase 26% for the third quarter of fiscal 21 if revenue increases 17%. In a broader sense, fiscal year sales are forecast to increase by over 14% to USD 163.5 billion. Sales in fiscal year 22 are expected to increase by a further 10.5% in order to extend the sales development between 10% and 15% over five years.
Adjusted earnings are expected to increase 28% and 10%, respectively. This is impressive for a company that went public in the mid-1980s and highlights its steady, cloud-centric revenue streams.
Microsoft’s earnings revisions help achieve a Zacks Rank 2 (Buy), and 20 of the 22 broker recommendations Zacks has are “Strong Buy”. Additionally, MSFT ended the final quarter with cash and equivalents of $ 132 billion. The company has used this supply to finance both acquisitions and buybacks. MSFT returned $ 10 billion to shareholders through buybacks and dividends last quarter, up 18% from the same period last year – the dividend yield is 0.86%.
As we mentioned earlier, MSFT hit new highs in April and broke above $ 260 for the first time on Friday. The run helped him break out of a period of relative stagnation that rose 45% over the past year and lagged behind the 58% of his industry. However, the stock has more than doubled in the past five years, rising 360%. MSFT is trading at a premium for its industry, but Wall Street is clearly ready to pay for the tech titan.
The most recent run took Microsoft to an overbought level in terms of the RSI at 70. Therefore, a pullback before or after the Q3 report might be appropriate even if strong results and guidance are released. Long-term investors shouldn’t worry too much about timing MSFT, however, as it has never been more important to their clients large and small.
Apple AAPL Q2 FY21 results on Wednesday April 28th
Its market cap of $ 2.24 trillion makes Apple the most valuable company in the world, surpassing the second largest MSFT of $ 1.96 trillion. Like its peer, AAPL is up roughly 12% since late March, but at $ 134 per share, the stock is still 8% below its January highs. This could cause the result to move.
Apple is already up 90% in the past year, thanks to stability, lots of cash, 4-for-1 stock split, growth prospects and a lot more. The company ended the last quarter with net cash of $ 84 billion and plans to continue to buy back shares and pay dividends to achieve a “cash-neutral position” over time, which is good news for investors.
AAPL’s 0.60% dividend yield drops well below the US Treasury’s 10-year 1.56%. But let’s remember that the stock is up 400% over the past five years, down from 175% in the tech sector and 110% in the benchmark index.
The stock is trading below its annual median in terms of 12-month forward earnings and at a slight discount to the technology sector. Apple currently receives a Zacks rank 3 (Hold) as well as an “A” rating for growth and a “B” for momentum in our style scores system.
Apple posted sales growth of 21% last quarter, beating our sales estimate by nearly 10%, driven by the strength of its new iPhone 12. With the first 5G-capable smartphone from AAPL, iPhone sales increased by 17% to around 60% of total sales. It wasn’t just the iPhone that did well in the first quarter. IPad and Mac sales grew 42% and 23%, respectively. The Apple Watch and AirPods heavy wearables unit gained 29%.
Wall Street continues to focus on CEO Tim Cook’s mission to continually make money from its massive and growing user base. These service measures go well beyond the App Store and include Netflix NFLX and Spotify SPOT competitors, as well as a subscription news offering, video game platform, digital training courses and much more.
Apple ended the quarter with over 620 million paid subscriptions, 140 million more than the same period last year. Along with its subscription efforts, the company intends to bring more chips into the company. And AAPL has reportedly been considering entering the EV room. Additionally, Apple recently pushed ahead with its privacy efforts – a move that is affecting Facebook FB and others – as the issue is paramount with governments and consumers.
Zacks estimates that AAPL’s revenue will increase 33% in the second quarter to increase adjusted earnings by 55%. Overall, an increase in the adjusted EPS value for fiscal year 21 of 37% is forecast. Revenue for 2021 is expected to grow 23% to $ 337 billion. This is the strongest growth since 2015. The company is expected to grow further over the next year and has exceeded our EPS estimates by an average of 19% over the past four quarters.
With all stocks, playing Apple for short-term gains is risky. Investors looking to hold the world’s largest company in the years to come should buy AAPL at an 8% discount while the S&P 500 continues to break records.
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