Q1 2020 reports – COVID-19 data points

The first view of the lockdown starts this week. 

• The most important reporting season for many years is about to begin in earnest giving the first concrete idea of how the current pandemic and the economic knock-on effect is going to affect the technology sector.
• Listed below are some of the key companies reporting this week and what I expect them to report.
  • NETFLIX – Tuesday 21^st April
  • Netflix has rallied strongly on the back of the quarantine entertainment usage jump, but it will need to add subscribers to show a revenue boost.
  • Existing subscribers using the service more will not help and will in fact put pressure on margins due to higher cloud costs.
  • App Store download charts have not indicated the big jump in downloads which would accompany a meaningful increase in subscribers and so I am pretty cautious on this one overall.
  • Hence, I suspect there will be a lift in new subscribers but not enough to satisfy what the market is now pricing in.
  • Disney looks like a better bet with its Disney+ service but I would wait until there is visibility on the costs and timings of its theme parks before rushing into this one.
  • SNAP – Tuesday 21^st April
  • I expect to see a big jump in usage but not in revenues.
  • Digital ecosystems funded by advertising are having a hard time as marketers are cutting costs like everyone else.
  • This has led to a collapse in the price of digital advertising which will hurt all players in this sector.
  • Google has already admitted that it has not escaped scot-free (see here).
  • Seagate – Wednesday 22^nd April
  • Seagate is one of the core suppliers of storage and as such should have benefitted from demand driven by the jump in cloud usage triggered by home working and homeschooling.
  • I am looking for the consumer to be very weak but more than offset by strength in the enterprise and in the cloud.
  • Intel – Thursday 23^rd April
  • Intel is looking very defensive at the moment with its 90%+ share in data centre chips and its very low valuation compared to most of the rest of the sector.
  • Intel should have benefitted both from the data centre but also from a jump in demand for laptops as people upgrade their equipment at home for working and schooling.
  • Amazon – Friday 24^th April. 
  • Amazon is probably one of the best positioned with its dominant position in both the cloud and in e-commerce.
  • The problem, as usual, is the valuation as the shares have already recovered everything they lost and made new highs.
  • However, the momentum is likely to remain and so despite my valuation concerns, I would sit tight in this one although taking some profits on the rally since April 3^rd when I bit the bullet and recommended it for the first time ever is also not a bad play.
• There a large number of other technology companies also reporting earnings this week, but these are the ones I would look most closely at given their exposure to the lockdown trend that has emerged.
• I see no reason to back out of the cloud theme at this point and would leave positions in Microsoft, Amazon and Alibaba where they are for now.
• That being said, the equity market is defying reality at the moment and is pricing in an almost impossible V shape recovery as soon as lockdown ends.
• One look at the oil price which made a 21 year low this morning tells one exactly where demand is going and so any position in equities at all at the moment looks dicey.