y Colin Cieszynski, Chief Market Strategist and Jasper Lawler, Market Analyst, CMC Markets
LinkedIn and Lions Gate collapses remind traders not to be complacent about earnings
The biggest action in the tech sector by far of the week was the 40% plunge that followed LinkedIn’s earnings report Thursday night. What’s particularly amazing is that traders totally ignored a big beat on earnings, $0.94 vs street $0.78, and steady sales of $861M vs street $857M. Instead, traders totally focussed on soft 2016 sales guidance of $820M below street $867M for Q1 and $3.60-$3.65B below street $3.90B for the full year. This fall off a cliff confirms that the street is far more focused on assessing future prospects than rewarding past performance.
LNKD shares plunged on the open Friday taking out a channel bottom near $170 and leaving a huge bearish breakaway gap in its wake. With momentum plays like Tesla Motors and fallen stars like Twitter reporting this week, we could still see significant moves following reports and that any sign of softness could be punished severely.
Friday morning also saw the shares of Lions Gate plunge, falling near 30% after the company reported a big miss on earnings $0.42 vs street $0.50, and on sales $670M vs street $765M. Management blamed the short fall on The Hunger Games: Mockingjay Part Two which even at $650M gross box office was considered a disappointment relative to its predecessor. The company indicated that the film’s underperformance has its earnings running $100M below forecast. More importantly, perhaps, this result also reminded the street that big franchise films are not guaranteed success and wondering what the company can do for an encore.
Perhaps the most important takeaway from both of these nosedives is that even though recent market declines have brought down expectations somewhat, stocks can still fall further if the news is bad enough.
Technology/Entertainment Earnings outlook for the coming week
Walt Disney Feb 9 AMC
Street $1.44 13.7% growth
Sales $14.7B 10.0% growth
Forward P/E 16.8
The House of Mouse’s shares could reach a critical turning point around its earnings report. The shares have been trending lower since mid-December as speculation shifted from how well Star Wars: The Force Awakens could do to how 2016 could be shaping up without an Avengers movie and questions over whether Rogue One will do as well as other Star Wars movies without the main cast of characters.
Many companies have done well on earnings and then disappointed on guidance this quarter and Disney appears at risk of doing the same. Results from its cable networks like ESPN could also be critical. The shares are retesting their summer lows which came after disappointing news from the network side which has been losing viewers to streaming services like Netflix. While one would think expectations are relatively low, and a bounce possible Lion’s Gate’s plunge Friday indicates that the risk of further declines can’t be ruled out.
Twitter Feb 10 AMC
Street $0.12 0.1% growth
Sales $710M 48.2% growth
Forward P/E 40.8
This week’s results could be a make or break moment for Twitter. The shares have been under relentless pressure for the last nine months, falling to all-time lows under $20.00. Rumours have been floating around over the last week suggesting more disappointing subscriber growth and LinkedIn’s selloff suggests sentiment toward social media companies other than Facebook is wary.
Recent middle management departures also suggest the potential for disappointment or at least a lower chance of a positive surprise. Takeover rumours have come and gone with each one having less impact on the shares which suggest either potential suitors don’t like what they see or the rumours are more hope than reality.
On the other hand, if any of them turn out to be true, shares could take off in a big hurry. And you never know, takeover bids often are announced around earnings reports. Look at the grasping at straws rumours of a deal between Hasbro and Mattel last week in between the two companies’ results.
This week’s results and the trading response may give an indication of whether can turn it around like Facebook did after its rocky start as a public company, if Twitter’s star could continue to fall like Groupon or if it could attract takeover offers from bargain hunters.
Tesla Motors Feb 10 AMC
Street $0.10 growth
Sales $1,824M 66.4% growth
Forward P/E 209.5
Much of the potential growth for Tesla comes from the company transitioning electric / autonomous driving vehicles from the niche luxury space into mass production. This transition is happening slower than hoped and leaves the company open to competition from the likes of Apple, Google and the traditional automakers.
The announcement of a slower than expected number of deliveries of its new SUV, the Model X in the fourth quarter implies full year 2015 deliveries at the low-end of Tesla’s full year guidance of 50,000-52,000 units. As a higher margin model, slower Model X production could also weigh on earnings.
The chart below shows the share price near a long term support zone between $180 and $195.
If the company can surprise with higher deliveries, especially of the Model X, it could support a rise back towards$ 240. Worse than expected deliveries could see $180 eventually break and prompt a sharp decline towards $150.
Weekly candlestick chart for Tesla
Source: CMC Markets, 26/1/2016
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