The technology sector was the biggest drag last quarter with most top players showing lackluster results. The sector’s downtrend seems to have spilled over to the third quarter, with modest improvements seen thus far not yet enough to set a bullish mood for the space.
Total earnings for the sector are expected to be down 1.2% in Q3 compared to a 9.6% earnings decline in Q2. Moreover, revenue growth will likely double form the prior quarter. This is evident from the latest Intel Corp. (INTC) release, wherein both the top and the bottom line beat our estimates (read: Semiconductor ETFs in Focus on Intel Earnings Beat).
However, the missing streak continues forInternational Business Machines (IBM), the largest computer-services provider. The company has missed revenue estimates for six consecutive quarters. This has resulted in a huge sell-off in IBM shares in after-hours trading yesterday, suggesting that more pain could be in store for this company in the near term.
IBM Results in Focus
The company suffered a big revenue miss by nearly $1 billion in Q3 due to sluggish demand for computer hardware and weak sales in emerging markets, in particular China. Revenue dropped 4% year over year to $23.7 billion. China’s economic reform plans and broader execution problems have led to a 40% year-over-year decline in hardware sales in the region.
IBM nevertheless reported better-than-expected earnings of $3.99 per share, beating the Zacks Consensus Estimate by 3 cents.
The continued disappointing top line no doubt increased worries about the company’s revenue growth story, leaving investors feeling a little bearish about this stock for at least in the near term. IBM shares fell more than 6% in after hours Wednesday trading on heavy volumes.
However, the long-term prospect of the company does not look bad given continued growth in cloud computing and software segments. Further, growth in emerging markets will likely return to mid single digits next year after the implementation of China’s new economic plans.
Currently, IBM has a Zacks Rank #3 (Hold). Moreover, we have a Neutral recommendation on the stock for the long term, suggesting some room for the upside.
ETFs to Watch
The results of IBM and its big revenue miss could have a huge impact on tech ETFs that are heavily invested in this large company. Below, we have highlighted three technology ETFs with the highest allocation to IBM that could be in focus in the days ahead.
Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the IBM price, or avoid them if IBM looks to drag them down to close the year (see: all the Technology ETFs here):
iShares Dow Jones US Technology ETF (IYW)
This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 143 stocks in its basket with AUM of $2.6 billion while charging 46 bps in fees and expenses. Volume is moderate as it exchanges more than 300,000 shares in hand a day.