'The (negative sentiment) pendulum has swung too far, and this earnings season gives us a chance to reset,' says Adam Johnson, Portfolio Manager at Adviser Investments, who joined Closing Bell to offer a bit of hope for the tech sector, despite headwinds like inflation and a slowdown in ad revenue.

Closing Bell

Despite Negative Sentiment, Big Tech Could Have a Positive Earnings Week

Welcome back to cheddar news, closing bell earnings season kicks into high gear this week with more than a third of all s and P 500 companies reporting their results and big names that are sure to move the broader markets? The big five tech giants are releasing second quarter earnings Microsoft and alphabet reporting on Tuesday facebook owner meta on Wednesday, apple and Amazon releasing their numbers on thursday. We said it's gonna be a big week joining us now. Is Adam johnson, portfolio manager at adviser investments. Adam, welcome to the show. All signs point to a rough quarter for these tech companies amid inflation and of course, a pullback in advertising revenue. What do you have your eyes on? Actually? I don't think it is a rough quarter. In fact, I think it's better than a lot of people had thought so much. So actually that if you look at the beat rate right now, it's about 68% meaning of the companies that are reported thus far, 68% are coming in better than the estimates. Now I will grant you had, um, that if you go back historically, typically that ranges anywhere from 65 to 80. So, okay, fair 800.68 is on the lower end. But the point is, companies are still beating. So, you know, I think it just gets to the fact that there is so much negativity from the University of michigan consumer sentiment to the Bank of America institutional survey last week, we're seeing sentiment just so negative and I think actually the pendulum has swung too far and that this earnings season gives us an opportunity to reset. What would it mean for investors and of course the economy, if tech does take a hit this week for earnings. Well, so many of these names are already down so far. I mean look at facebook or meta if you prefer right, The stock was 330 bucks and now trades 1 61 70. you know, you look at google down 30 35%. Um, so many of these stocks are already down so far. We haven't even talked about, you know, paypal Square salesforce dot com et cetera. Um that I honestly don't think that the bar is set very high in other words, you could have earnings that at least nominally don't look great and I'm not sure the stocks go down all that much to be perfectly honest with you Hannah so much has been priced in. I'm so glad you mentioned meta because last week we saw a slowdown and ad revenue, Her companies like snap and twitter, what effect do you think it will have on metal which of course is heavily reliant on advertising adam. Yeah, like about 90-95%. I'll tell you what I think is exciting about meta and I still want to call it facebook. So it's funny as I stumble to say meta, but there is still monetization that has yet to happen and that monetization is far away from advertising. In other words, an example. I like to give kim Kardashian wears a new pair of shoes. She takes a picture she posted on her instagram news feed and suddenly you see it and she says, hey, I love my new shoes do you? And there's a click to buy link right there um, that I believe is coming and all of a sudden you take a look at that and say, wow, I like the shoes I want them. And because facebook or instagram or meta, if you prefer, will already have all of your information where you live, what your shoe size is, what your credit card number is with one click, just as though you're on amazon you'll be able to buy. I think that's something that's in the works. That is the sort of monetization opportunity that is far away from advertising and I think provides some exciting upside for meta in particular. Do you think meta is putting itself in a bad position by investing billions of dollars in the metaverse as the stock plummets? It's kind of hard to say because we don't really know what it is. I don't like, you know what it is? I don't think, I know what it is. We can kind of, you know, try to try to sort of guess what it might look like. It is, it is a cooler hipper Farmville um, might it be something that kind of looks like that scene from, from, from Star Wars where you know Princess Leia peers as the little blue hologram Help me Obi wan you're my only hope. Um it might be some combination thereof. I mean imagine actually if there were some sort of if my office here were covered completely LED screens and instead of you and I just talking sort of superficially on these two dimensional screens, if in fact we were able to sort of see one another in the immersive environment and imagine if you actually were over there. Yeah, there you go. Uh those kinds of images, you know, if we were actually able to interact with one another in some sort of um artificial but yet still realistic space. I think that's the promise of the metaverse. All we know is that it's cost basically 10 billion thus far, probably another six billion this year. Um And video is producing the chips that will power the supercomputer that in theory will make all this stuff possible. Um At this point I think it's kind of a wing and a prayer, but with um meditating down around 13 times earnings a lot cheaper than the S and P 500 An ability to connect with 2.2 billion people every day. I think you sort of have to just kind of stay tuned and watch Curiously. The tech sector has been hit hard with a hiring slowdown as you well know Adam, do you expect this to reflect in the earnings report? No, I don't. And actually a lot of these companies are still hiring. I mean the announcement that everybody was talking about last week was Apple, where they said we will slow our rate of hiring. Note how they worded that we will slow our rate of hiring. So we're still hiring. And they said by the way, only in certain groups, which would suggest again, if you read between the lines that some of the other groups are, are still going full speed ahead. I think what we're seeing is companies and Ceos in particular, um, hedge, they don't know exactly what's out there. Jamie Diamond famously six weeks ago said there's a hurricane offshore. I think that was a wake up call for a lot of people. He said, we don't know if it's actually gonna come to shore, but we need to be ready. And I think what we're seeing in all these comments from companies talking about slowing their hiring is just an attempt by C. E. O. S and C suites in general to sound smart as though, hey, we're watching this thing, our eyes on the ball. Um, we're not gonna go willy nilly, we're not gonna hire. Uh, as we have been, we're gonna be thoughtful about the process. You know, um, it's the easiest thing in the world right now for a Ceo to just sort of raise the cautionary flag and then honor that because he or she sounds intelligent to the shareholders and that's just ultimately what shareholders want to hear. They want to hear a responsible ceo, who's, who's balanced in the approach that is expected to raise interest rates, another 75 basis points this week. Have tech companies been dealing with these rising interest rates? Do you think they can handle another rate hike at them? Yeah, I do. I was actually just um, digging into the Silicon Valley bank shares earnings report from last week. Um, interesting company that got absolutely crushed by earnings. Then you actually dig into the report and you realize, hang on, um loan balances were still up, customer loans were still up what they're having to do in part because of the raising rates that you're talking about is set aside more capital for loan, potential loan loss reserves. And so there's this kind of indirect thing that's happening to financials to technology firms whereby you have to honor the fact that rates are going up, that therefore you're borrowing costs are going up, that therefore your future earnings are worth less because you have to discount them at a higher rate, but it doesn't necessarily affect the, you know, the immediate bottom line. It's not necessarily a direct um, one for one or it doesn't necessarily take out of core earnings. It's just something again like that like that comment from Jpmorgan Yeah. You know, there's a hurricane off there. We don't know where it's going, but we gotta be aware of it. I think that's more the narrative and I think I think what we're going to find is that over the course of earning season That that more balanced approach is what starts to play out rather than the emotion. Silicon Valley Bank Shires was down a lot this week. It's up eight or 10% this week again because I think people are starting to to reflect and actually be thoughtful in their approach. Adam, johnson, portfolio management at adviser investments, always appreciate your time. Adam, thank you so much.