Tech Stocks: No “Earnings Recession” Here!

Tech stocks like Shopify Inc (TSX:SHOP) are reporting earnings this week. The early signs from U.S. tech companies have been good.

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Last week, big U.S. tech companies began reporting their earnings for the first quarter of 2023. The results were generally ahead of estimates; for example, Alphabet revealed that its revenue grew, and that its rate of decline in earnings slowed down. Meta Platforms and others also put out earnings that were well ahead of expectations.

The results seen from U.S. tech companies last week call into question the narrative that we are in the midst of an “earnings recession.” This year, analysts have been busy cutting corporate earnings estimates because of a belief that earnings will decline due to a poor economy. The actual results posted suggest otherwise. Most of the U.S. tech companies are posting positive revenue growth; a few are even growing their earnings.

In this article, I will explore last week’s U.S. tech earnings releases and what implications they have for the Canadian tech companies that report earnings this week.

Microsoft beats earnings

Microsoft (NYSE:MSFT) was a big winner in last week’s U.S. earnings bonanza. It not only beat expectations but also delivered positive growth in net income, which most of its peers were not able to do. In the first quarter (Q1), MSFT delivered the following:

  • $52.86 billion in revenue, up 7%
  • $22.35 billion in operating income, up 9.7%
  • $18.3 billion in earnings, up 9.4%
  • $2.45 in diluted earnings per share (EPS), up 10.3%
  • A 34.92% profit margin

Overall, it was a very strong quarter. Microsoft easily beat estimates on both revenue and profit, and it guided for further strength in the second quarter. If Microsoft’s results are any indication, then Canadian tech companies might put out good earnings when they report this week.

What’s next for Canadian stocks?

This week, Canadian tech companies will begin reporting their first-quarter earnings. These releases will show investors whether the companies in question are growing, profitable, and, overall, worth investing in.

Shopify (TSX:SHOP) is one Canadian tech stock that will be reporting soon. Its release comes out on May 4 — the same day that Apple releases its earnings. Most likely, SHOP’s release will be overshadowed by Apple’s more closely watched earnings, but it will be notable in many ways itself.

For one thing, investors will want to know whether Shopify can keep up its high revenue growth. In 2022, Shopify’s revenue growth decelerated considerably, falling into the low teens. In the fourth quarter, it picked up a little, reaching 26%. Revenue deceleration has been a concern for Shopify, which was previously growing outrageously quickly (sales increased 86% in 2020), but lost its growth in 2022. If revenue growth picks up again, particularly if it exceeds the rate of growth analysts expect, then SHOP stock will likely rally.

Another thing investors will be watching in Shopify’s first-quarter earnings release is its profitability. Shopify was not profitable last quarter, partially because of losses on its stock portfolio. However, now, with tech stocks rising, Shopify may be able to become profitable again. It already has positive gross profit, but it’s suffering from the earnings impact of a weak stock market. There is a decent chance that Shopify will turn profitable in Q1, but it’s not guarantee. Therefore, it’s something that investors will want to watch closely in SHOP’s Q1 earnings release.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Andrew Button has positions in Apple and Alphabet. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Alphabet, Apple, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.

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