Breaking Down The First Week of Big Tech Earnings

Reading through the lines as we enter another packed week of big tech earnings.

It’s that special time again. The season we love the most. No, it’s not Winter. It’s Earnings Season! And judging by the historic volatility we’ve already seen this month, this earnings season is sure to be unforgettable. 

Using Netflix, Microsoft, and Tesla as bellwethers, we can draw a lot of conclusions about how companies, specifically big tech, will be judged. So, let’s hop right into the results we’ve already seen.

Netflix ($NFLX)

Last week Netflix reported, setting a really bearish tone for tech. They beat on EPS by 61.48% and on revenue by .03%. But when it came to forward guidance? The company reported that it expects 2.55 million new subscribers in the upcoming quarter — a far cry from the 6.93 million that analysts expected. Unless you were living under a rock this week, you saw what happened.

Source: TradingView

Netflix got rocked, falling much more than its average post-earnings move of 6.9%, dropping as low as $351.46. That’s nearly 50% below its all-time high of $700.99. 

So what did we learn from Netflix that we can carry forward to the rest of this earnings season? You can beat estimates in the past, but if you can’t perform in the future, you’re going to get punished. 

For options traders, this kind of outsized move can be an exciting thing. One reddit trader took to Wall Street Bets to share their extremely risky, yet massively profitable downside bet.

Source: Wall Street Bets

Microsoft ($MSFT)

This week Microsoft led the way, with CEO Satya Nadella reporting numerous record-breaking achievements. The tech giant saw record sales in cloud, record sales in PC segments, record quarterly sales, and of course a beat on both revenue and EPS. Upon the release of this news, what did the stock do? It fell 5% after-hours…

That is, until CFO Amy Hood released positive guidance. The CFO announced that Microsoft expects fiscal third-quarter revenue of $48.5 billion to $49.3 billion, higher than the street’s expectation of $48.11 billion. 

Source: TradingView

This was enough to pull Microsoft back into positive territory, with a gain that was in line with its average earnings move, but it begs the question: 

What is the market looking for this earnings season? Guidance, guidance, guidance. 

The market is taking a somewhat fickle look at tech. It’s possible that in the wake of the FOMC meeting and the realization that rates are about to begin rising, investors are deciding which growth names they feel comfortable owning. Which stocks justify their ‘priced-in potential’? 

Tesla ($TSLA)

That brings us to Tesla. Tesla reported earnings Wednesday night, posting an EPS and Revenue beat of 6.88% and 6.49% respectively. CEO Elon Musk went on to report that he expects “significant growth” for Tesla that lands “comfortable above 50%”. However, comments about supply-chain issues and chip shortages that will likely persist through the year were a boon for the EV maker. Upon hearing that factories were running below capacity due to supply bottlenecks, Tesla fell, and is down more than 9% at the time of writing. This was above the average move of 5.8%. 

Source: TradingView

Apple ($AAPL)

Apple is the final mega-cap tech giant to report this week, up against an expected move of 4.6% and an average earnings move of 3.5%. The $2.59T company (currently the largest market cap in the world) reported an EPS of $2.10 compared to the streets expectation of $1.89, and a revenue of $124.08B compared to a street expectation of $118.1B — a strong beat on the top and bottom lines. At the time of writing, the stock reacted positively to the news, currently up 2.6% after hours.

Although it’s still after hours, and anything could happen between now and the opening bell, it’s important to keep an eye on how Apple trades off of this news for clues about how the whole of the Nasdaq and the S&P will perform going into the new week.

Options, IV Crush, & Discipline

As always, but especially as options traders, discipline is key here. That goes double when you’re looking at earnings. It can be tempting to see a huge, outsized move like Netflix’s and want to jump in with both hands in search of the next one. But you have to be extremely cautious. 

Market-wide volatility is already high, and if you’re looking at a stock that’s about to report earnings, it’s even higher. Once the company reports, you’ll have to contend with IV crush, which is what happens when the potential surprise is let out of the bag. It means your option will be holding considerably less extrinsic value than it was the night before. 

For instance, despite Microsoft having an average earnings move of just 2.4%, the options chain was pricing in a post-earnings move of 7.1%. That’s a high bar to hurdle, and it means you would have likely lost money due to IV crush regardless of whether you were directionally right. 

Why It All Matters

You don’t have to play earnings for earnings results to matter. The results of earnings week, especially for tech, tend to permeate throughout similar businesses, and even whole indices. All it takes is one look at the Nasdaq to prove that. As Netflix fell, so did the rest of the streaming sector, along with most tech and growth names. 

What does that mean for you? If you thought you were safe playing Disney during Netflix earnings, you woke up to a surprise. To give another example, when AMD reports next week it will likely affect competing names like Nvidia, even though Nvidia doesn’t report until weeks later. 

Good traders are like investigators; they will gather clues and use any bits of information they have to draw conclusions about the future. So to stay ahead of the market, we have to be like investigators too. We have to take in as much knowledge as possible, listening to what the CEOs are telling us, and how the market reacts. That’s why it’s crucial to pay attention to earnings season.

The Next 7 Days

A lot to take in? Buckle up. This was only the start to what will be another packed week. Next week several more tech titans will step up to reveal how they’ve performed over the past quarter, and how they expect to perform in the next. Check out the biggest reports coming in the week ahead:

Monday 1/31: Alphabet ($GOOG), Advanced Micro Devices ($AMD), and Paypal ($PYPL)

Tuesday 2/1: Meta ($FB) and Qualcomm ($QCOM)

Thursday 2/3: Amazon ($AMZN)

And that’s just the tip of the iceberg!

The bottom line: Earnings season is so important. With this being the first earnings cycle of the year, it’ll likely set the tone for what’s to come in the first half of the year. You can bet that we’ll be watching closely, reporting back about the next earnings onslaught, just as we did today. As always, beware of trades that put on excessive risk, stay disciplined, and remember to trade smarter.