MorningWord 6/18/15: High Pressure $ORCL $JBL

by Dan June 18, 2015 9:38 am • Commentary

Technology stocks, as measured by the Technology Select etf (XLK), are up 3.3% on the year, making it the fourth best performing sector in the S&P 500 (SPX) behind Healthcare, Consumer Discretionary and Basic Materials. Apple (AAPL) makes up about 18% of the index etf’s weight. Amongst the 9 next largest stocks in the XLK (that total about 40% of the index) none are up more than 5% on the year. Obviously, AAPL’s 15% year to date gains on its $700 billion plus market cap is doing most of the heavy listing in a sector that could be listing a bit.

After the close last night we got a couple important data points on tech spending that could provide a view on both enterprise and consumer.  First, ORCL missed consensus for their seasonally strong Q4 and guided down in the current quarter. From Barron’s Tech Blog:

Database and applications giant Oracle (ORCL) this afternoon reported fiscal Q4 revenue and earnings that missed analysts’ expectations, noting the impact of the rising U.S. dollar.

Revenue in the three months ended in May fell 5%, year over year, to $10.71 billion, yielding EPS of 78 cents.

Revenue would have been up 3% in constant-currency terms, Oracle noted.

Oracle said its revenue from cloud computing rose 29%, year over year, to $416 million, counting just things listed as “software as a service,” or “SaaS, and “platform as a service, ” or PaaS.

Hardware product sales of $818 million were down 6%, though it would have been up 3% in constant currency.

Some analysts are trying to explain this miss and outlook as company specific. Here’s what Citi Analyst Walter Pritchard had to say in Barron’s Tech Blog:

“An 8% license revenue miss is the largest we’ve seen in memory and is surprising,”

“even if mostly made up by stronger cloud bookings.” It’s also puzzling, he writes, given what were easy “comps” for the year-earlier period.

ORCL is also in them middle of a shift from a licensing model to a subscription model. Business Insider’s Julie Bort has a great summary here: (Larry Ellison just gave a really good reason why he was happy with Oracle’s disappointing quarter).

I suspect there are a combination of factors affecting the company’s poor performance. While many may be transitory, one big one may be that they simply have too many cooks in the kitchen right now. They have co-CEOS and former CEO Larry Ellison still making his presence felt as CTO. And that’s during a time when they are negatively affected by the strength of the dollar, and possibly a recent down-tick in corporate IT spending.

The second data point we got last night was from Jabil Circuit (JBL), contract manufacturer to the tech giants, with AAPL its largest customer at 18%, CSCO at 10%, followed by Sony at 9% and HPQ at 8.5%.  Could JBL’s weak guidance speak to a slow down in consumer demand? Possibly. But the company specifically singled out corporate spending, per Tiernan Ray of Barron’s:

the company has seen weakness in manufacturing products for the enterprise market and other equipment, within its “electronics manufacturing services,” or EMS

These two data-points are hard to ignore as we head into the end of Q2 and earnings season quickly upon us. During Q1 reporting season back in April and early May there were very few large tech companies that saw their quarterly reports and guidance spark sharp rallies (AMZN, MSFT & NFLX were three massive outliers). Most stocks continued in consolidation patterns, or failed at obvious breakout points.

Playing for breakouts has been a tough way to make money of late.  Prior to ORCL’s decline of 7% today, the stock looked like a prime candidate to re-test new highs:

ORCL 1yr chart from Bloomberg
ORCL 1yr chart from Bloomberg

Same for JBL prior to today’s 7% decline:

JBL 1yr chart from Bloomberg
JBL 1yr chart from Bloomberg

And FDX from yesterday following it’s disappointing results and guidance:

FDX 1yr chart from Bloomberg
FDX 1yr chart from Bloomberg

Oh, and ADBE following its disappointing results & guidance from Tuesday night:

ADBE 1yr chart from Bloomberg
ADBE 1yr chart from Bloomberg

New highs are being rejected on worse than expected news in growing numbers. Could this be a canary in the coal mine as we head into Q2 earnings?

We don’t know yet. But here is the thing. At this point, with less than 2 weeks to go in Q2, for all intents and purposes these quarters are done and dusted. And the ability for the S&P to break out to new highs this summer likely rests, at least in the near term, on forward earnings and sales guidance.  Technology, sporting the highest weight in the S&P 500, could be echoing performance of market tops where only a few stocks are doing the heavy lifting.