Tech review: Earnings take centre stage as Apple reaches record high

Apple has been the second worst performing Magnificent 7 stock so far this year, however, the successful launch of the new iPhone 17, which is outselling the iPhone 16 by more than 10%, has pushed the stock up to a record high on Monday, and the stock price is surging by 4% at the start of this week. In the last 4 weeks, Apple’s performance has flipped, and it is now at the top of the Magnificent 7.

This is a big week for tech; it is the start of the sector’s Q3 earnings season. A strong performance in Q3 is seen as critical to the Magnificent 7’s outperformance this year. This week we get Tesla and Netflix as the US earnings highlights.

The tech sector, as usual, is central to earnings season. Analysts expect Q3 earnings to top 12% YoY, and revenues are expected to rise by 14.6% for the Magnificent 7. This would be a small moderation compared to Q2 results when earnings growth was 26.4% and revenues expanded by more than 15.5%, however, the tech giants are still expected to do most of the heavy lifting for the US blue chip index this earnings season.

Expectations are high, and analysts have been revising their earnings expectations higher in recent weeks. There is some concern that earnings growth could disappoint the high bar that has been set. Added to this, tech stocks have tended to beat expectations in recent quarters, and when they have not managed to do this, then their stock prices have been punished. We expect the same could happen this time. Earnings revisions have been a key driver of the uptrend in equities, and upside quarterly revisions have been a key driver of US stocks this year alongside momentum and a preference for growth stocks. Due to this, Netflix could set the tone for this quarter’s tech earnings.

Netflix earnings preview: Strong subscriber growth expected as streamer goes all out on K-dramas

 Netflix may not be in the Magnificent 7, but it is typically the first tech stock to report its quarterly results, and its earnings report can set the tone for the larger tech firms who report results in the coming weeks.

The market expects Netflix to report $11.5bn of revenue for last quarter, and net income, or profit, of $3.02bn. Revenues have been revised a notch higher in the past 4 weeks; however, analysts have slightly revised down their expectations for net income. Compared to Q2, revenue growth is expected to rise, however, net income is expected to come in lower than Q2’s $3.12bn.

Overall, Netflix is expected to deliver on its aim for 17.4% revenue growth for last quarter. Success with live events, along with a strong slate of hits in recent months including K-Pop Demon Hunters, Wednesday and Squid Game Season 3, should fuel strong subscriber growth for last quarter. K drama is having a moment globally, and Netflix is on top of this trend. This highlights the strength of its content slate, which is positive news for overall earnings in Q3.

Advertising revenue is expected to have ramped up last quarter, as a growing number of customers opt for the cheaper subscription option. Q3 margin growth is expected to remain strong at 31.5%, although forward guidance could point to slightly lower margins in Q4 due to expenses arising from hefty content creation as we move into the holiday season, including Stranger Things, a new Knives Out movie and more live NFL content.

The earnings call could end speculation that Netflix will make an offer for Warner Brothers, since the business models are so different and it is hard to see how Netflix could absorb Warner Brothers whilst making cost efficiencies. This may boost Netflix’s share price, which is higher by more than 30% so far this year, and is rallying into this earnings report, the stock price is higher by more than 2% on Monday.

If Netflix does rule out buying Warner Brothers, then the latter’s share price could come under pressure since it has been one of the top performing US stocks in the past 6 months and is higher by more than 120%.

Tesla: Earnings high point could test investor enthusiasm

Tesla will also release earnings on Wednesday after the US market closes. Analysts have been rapidly upgrading earnings forecasts for Q3 after the company reported record deliveries of its cars in the US last quarter, due in part to the expiration of an EV tax credit by the US authorities.

The market expects Tesla to report revenues of $26.2bn, and net income of $1.9bn. This is significantly higher than Q2’s revenues of $22.4bn and net income of $1.39bn. The stock price has had a strong run since April, and is higher by more than 100%. In the lead up this earnings report, the stock price has rallied by 5.85% in the past month. The question is, will this be the high point for Tesla?

The risk is that deliveries and revenues fall in subsequent quarters now that President Trump has cut the EV subsidy. To try and offset this, Tesla may formally announce that its new Model Y will be released before year end. Analysts will also be eagerly awaiting any news on potential revenues from Robotaxis, which could generate billions for Tesla in the coming decade, and are seen as the main future driver of growth for the company.

Overall, the market reaction to this earnings report will depend on investors’ patience. Will investors be willing to buy Tesla on a promise of billions of dollars of new revenue from Robotaxis well into the future  even if revenues and profits fall in the coming months?  

Chart 1: Apple plays catch up with the rest of the Magnificent 7