The latest earnings season seemed to contribute to the sharp selloff in Wall Street stocks, as some companies reported bullish earnings that were more than offset by bearish guidance about future earnings prospects. The disappointing finance statements of some of the major technology giants last weeks, are now replaced with more optimism from Cisco, Viacom and Walmart.
The corporate earnings in Q3 2018 are expected to increase by 28.0% YoY, but excluding the energy sector, the earnings growth estimate declines to 24.6%. Of the 456 companies in the S&P 500 that have reported earnings to date for Q3 2018, 77.6% have reported earnings above analyst expectations. This is above the long-term average of 64% and in-line with the prior four quarter average of 77%.
According to the latest data, 60.4% of companies have reported Q3 2018 revenue above analyst expectations. This is in-line with the long-term average of 60% and below with the prior four quarter average of 73%.
End of crypto market boom collapsed the stocks of Nvidia
The American chip maker Nvidia felt the pain from the end of the cryptocurrencies boom. The company’s shares collapsed 19% on Thursday after it reported disappointing financial results for the third quarter. Nvidia said it expects 2.70 billion USD in revenue for the fiscal fourth quarter, excluding some elements. This was below analysts’ consensus forecast of 3.40 billion USD.
Overall, for the third quarter, Nvidia’s revenue rose by 21% year-over-year. The company reported earning of 1.84 USD per share, excluding some items.
The cryptocurrency mining product experienced a downturn in the second quarter, and this trend continued over the next quarter.
It has become less profitable to use GPUs for digging. To mine cryptocurrencies, the computers have to solve complex mathematical problems in exchange for a specific amount of Bitcoin or Ether. But after the value of both currencies sank, the same thing happened to this segment of Nvidia’s revenue.
In the third quarter, the company’s revenues from hardware and intellectual property reached 148 million USD, down by 23% year-on-year. Nvidia’s gaming business segment generated 1.76 million USD in revenue over the quarter, under the consensus forecast of 1.89 billion USD. The data centers have generated 792 million USD in revenue below the estimated 821 million USD. Revenue from business visualization has reached 305 million USD, surpassing 284 million USD as analysts expect.
Walmart reported surprisingly strong sales
The world’s largest retailer Walmart reported stronger-than-expected earnings on Thursday, driven by strength in the e-commerce business. For the third quarter, the big-box retailer reported adjusted earnings per share of 1.08 USD, beating analysts’ forecasts of 1.01 USD per share.
Comparable store sales, ex-fuel, for the third quarter grew at 3.4%. This was stronger than the 2.9% expected by analysts. However, net revenue for the quarter came in at 124.9 billion USD, missing estimates of 125.49 billion USD.
Walmart now expects fiscal year 2019 adjusted earnings per share of 4.75 USD to 4.85 USD, in line with the consensus forecast of the analysts of 4.80 USD and representing an increase from a previous guidance cut announced in mid-October. Walmart shares have risen 12.5% over the last three months, compared with a 4.1% decline in the S&P 500.
Cisco’s new business is paying off
Cisco Systems surpassed analysts’ earnings expectations for the quarter after the network equipment maker took advantage of the search for its routers and switches, as well as the growth of newer areas on which it focused. The company’s stocks rose by 4%, moving towards a near 16% growth this year.
Cisco has focused on software and cyber security to compensate for the impact of slowing demand on its routers and switches from companies increasingly clinging to the cloud services.
The revenue from software applications grew by 18% to 1.42 billion USD, which is above the average estimate of 1.37 billion USD.
The revenue from sales in computer security business, which offers firewall protection and breakthrough detection systems, increased by 11% to 651 million USD. The amount, however, was below the expected 656.4 million USD.
Transactions such as the 2.35-billion-dollar acquisition of the vendor Duo Security in August played an important role in fostering the growth of Cisco’s newer business ventures.
The revenue from the infrastructure platform, which includes switches and routers, rose by 9% to 7.64 billion USD and was above the 7.39 billion USD forecast.
Subscriptions, which offer a much more stable revenue stream, account for 57% of total software revenue for the first fiscal quarter. In the previous quarter, the share was 56%.
Corporate earnings outlook
Market volatility caused by President Donald Trump’s trade disputes and extreme weather could threaten the stability of Wall Street markets in the next quarters. Investors will be mostly watching on Brexit deal, energy prices and US-China trade war.
Relative to the current, the estimated earnings growth for 2019 is expected to slow or “revert to the mean” or long-term average as this blog has been writing about for a few months, but this is neither a red flag nor a warning about a longer-term bear market. Looking at the numbers, 2019’s full-year earnings per share estimate was rising 3-4% coming out of the first quarter of 2018, but now has slowed as analysts’ inherent caution about the future takes root.
The S&P 500 earnings per share is expected (given the above numbers) to be up 10% next year, relative to the current 2018 estimate, and my own personal opinion is that 2019 will eventually be a little higher than that, having tracked this data over the years.