Author: Max A. Cherney

FB – Facebook Reports Earnings on Wednesday. Expectations Are High.

Facebook reports earnings on Wednesday.


Alastair Pike / AFP via Getty Images

Don’t necessarily assume that

Facebook

will post less-than-stellar earnings on Wednesday because of all that’s swirling around the company right now—from antitrust and misinformation allegations leveled by Washington to the implications of

Apple

‘s new limits on ad tracking.

Wall Street certainly doesn’t think that’s the case, at least for the second quarter.

Facebook (ticker: FB) is expected to report a profit of $8.8 billion, or $3.52 a share—roughly 70% growth. And the consensus estimate for revenue is a nearly 50% increase, to $27.9 billion. Even Facebook’s monthly active user base is expected to grow 7.3% to 2.9 billion.

Now, it’s not that the threats don’t matter—they will at some point—but they simply don’t matter right now. Even a very real one here and now, Apple’s app tracking transparency initiative that went into effect in April and would force users to opt in to Facebook tracking outside of that app, doesn’t appear to have caused nearly as much damage to revenue as it could have.

The Street’s strong estimates, powerful results from social media rivals

Snap

(SNAP) and

Twitter

(TWTR) last week, and last year’s weak quarter for digital advertisers because of Covid-19 spending pullbacks are all fueling investor expectations. According to analysts, they’re looking for a substantial beat and bullish guidance for the third quarter.

For Evercore ISI analyst Mark Mahaney, Apple’s tracking shift isn’t the story. He’s going to be looking closely at Facebook’s monthly user count and how it stands up to mid-lockdown last year when people didn’t have much else to do. Mahaney expects user growth to slow down.

BofA Securities analyst Justin Post agrees about Apple. Early data that his team has reviewed suggests the new policy won’t have much impact in the second quarter. Post thinks investors should watch for commentary about the impact of the tracking changes in the second half of the year; his team is predicting the new policy could bring down third-quarter revenue by a mid-single digit.

Advertising aside, it never hurts to pay a bit of attention to Facebook’s virtual reality efforts. Chief executive Mark Zuckerberg has stressed how important the company’s VR and augmented reality business might become, and has staked billions on that claim. Second-quarter revenue, which includes the Quest 2 VR gadget, is expected to be $690.5 million.

Of the 58 analysts who cover Facebook, 48 give shares a Buy rating. Seven rate the stock Hold, and three have a Sell rating. The average target price is $392.91, which implies an upside of 7.3%. The stock ended Tuesday’s regular session at $367.81.

Shares have advanced 34% this year; the

S&P 500 index

has advanced 18%.

Write to Max A. Cherney at max.cherney@barrons.com

TXN – Texas Instruments Earnings Beat Expectations. The Stock Is Falling.

Texas Instruments had increased demand for its chips in the second quarter.


Dreamstime


Texas Instruments

reported double-digit revenue growth and fatter profits on Wednesday, but that wasn’t enough for return-hungry investors who decided to focus on the company’s forecast instead.

Shares of Texas Instruments retreated in the extended session, falling 4.4% after closing out regular trading with a gain of 3.5%, to $194.24. Shares have gained 18% this year; the PHLX Semiconductor Index has increased 18% as well.

Texas Instruments, which makes chips for autos, industrial applications, and personal electronics, reported second-quarter net income of $1.9 billion, or $2.05 a share, compared with a net profit of $1.4 billion, or $1.48 a share. Revenue rose 41% to $4.6 billion. Analysts had expected earnings of $1.84 a share, on revenue of $4.36 billion.

Demand for many of the company’s chips grew during the quarter, which slowed down delivery to customers. Inventory remains low and the company is adding manufacturing capacity incrementally, executives said on a conference call. A new factory is scheduled to open next year.

Finance chief
Rafael Lizardi
told reporters and analysts that the company doesn’t know how long the global chip shortage is going to last.

“We’ve read the ranges that it is going to end soon, and others that say it is going to continue for quite some time,” Lizardi said. “We’re not going to forecast the fourth quarter, or even comment on how long the cycle will last because, honestly, we don’t know.”

For the third quarter, the company expects revenue of between $4.4 billion and $4.8 billion; the consensus estimate is $4.4 billion.

The company’s guidance indicates executives expect a strong quarter, Lizardi said.

As chip demand has surged far beyond supply, investors have come to expect semiconductor businesses to widely exceed earnings expectations and offer bullish guidance. Those that don’t face the wrath of investors.

Write to Max A. Cherney at max.cherney@barrons.com

ZNGA – Zynga's Earnings Report Might Disappoint. Why the Stock Is Still a Buy.

People are spending roughly 7% less during the second quarter than the first with Zynga, according to KeyBanc analyst Tyler Parker.


Dreamstime

Shares of

Zynga

fell Friday, after a KeyBanc analyst warned investors that the mobile videogame company’s second-quarter earnings won’t include the typical upside investors have come to expect.

Zynga shares fell 1.4% to $10.53 during regular trading Friday, amid a broad rally across stocks.

Based on propriety Key First Look Data, KeyBanc analyst Tyler Parker wrote in a note late Thursday that people are spending roughly 7% less during the second quarter than the first with Zynga. Year-over-year spending remains up 21%.

The slowing spending could hurt Zynga’s live services, games that the company updates regularly to keep people involved, Parker wrote. Despite the concerns, Parker reiterated his Overweight rating on shares, and his $13.50 target price.

Zynga said it coudn’t comment due to the company’s quiet period ahead of earnings.

Throughout the Covid-19 pandemic, videogame companies have benefited from people stuck inside with little in the form of entertainment. Millions of new players have flocked to games, but KeyBanc’s data is potentially a sign that as pandemic restrictions lift, videogame companies may experience slowing growth.

Parker maintained his target price and rating on shares because he predicts Zynga’s advertising revenue could offset lost videogames bookings. Beyond the second quarter, Zynga also has a promising slate of game launches.

At a J.P. Morgan Securities conference in May, Zynga CEO
Frank Gibeau
said the company’s engagement and monetization rates remained elevated when it reported its first-quarter earnings. Even after the pandemic restrictions ease, people can still play short sessions of mobile games wherever they are, Gibeau said.

“Now, it might not be the same growth rate you saw during the pandemic, but recall that the mobile games business was growing at a pretty healthy rate prepandemic,” Gibeau said at the time.

Wall Street expects second-quarter adjusted earnings of 9 cents a share on bookings of $712.4 million when the company reports on August 5. Bookings are a common measure used by videogame companies that include the impacts of deferred revenue. Bookings estimates have remained roughly steady since the company reported earnings in early May.

Of the 19 analysts that cover Zynga stock, 17 rate it a Buy, one rates it a Hold, and the other a Sell. The average target price is $13.25, which implies an upside of 26%.

Last year, Barron’s wrote positively about Zynga, arguing that the company was poised to take advantage of the estimated two billion people who play mobile videogames. Shares are up 13% since Barron’s published the story in the Nov. 2 issue, as the

S&P 500

index advanced 32%.

Write to Max A. Cherney at max.cherney@barrons.com

EA – Electronic Arts Has Trailed Videogame Rivals. Why the Stock Could Catch Up Soon.

Videogame publisher Electronic Arts has had a busy few months, with two significant acquisitions that will bolster the company’s portfolio of popular franchises. Its stock, however, hasn’t been as exciting.

Since Barron’s took a positive view of the three largest U.S. game makers in October, EA (ticker: EA) shares have underperformed the S&P 500 index, rising 11% compared with the index’s gain of 24%.

However,…

AMAT – Analysts Are Raising Their Price Targets on Applied Materials Stock

Shares of Applied Materials have surged 18% so far this year.


David Paul Morris/Bloomberg

A surge in demand for chips used in products ranging from appliances to automobiles has created a favorable environment for semiconductor businesses that is likely to continue this year. One of the ways investors have sought to profit from the shortage is by owning stocks of companies that make the equipment used to manufacture chips.


Applied Materials

(ticker: AMAT) is one such name, and two analysts increased their price targets on the stock ahead of the company’s planned investor event on Tuesday. Applied Materials stock gained 1.1% to $143.05 on Monday, as the

PHLX Semiconductor index,

or Sox, rose 2%.

Credit Suisse analyst John Pitzer raised his target price to $175 from $145 on Sunday and reiterated the equivalent of a Buy rating on shares. Pitzer wrote that some investors may regard Tuesday’s event as a “sell-the-news” opportunity, but doing so would be a mistake, he noted.

Pitzer argued that investors can do well with Applied Materials shares because it has become very costly to expand chip manufacturing capabilities. The U.S. government has also signaled the importance of retaining and growing domestic manufacturing capacity, which could lead to demand for Applied’s products. Applied Materials stock is also cheap, Pitzer said.

“While cyclicality is a risk, the secular backdrop supports higher highs and higher lows meaning [earnings of greater than $10 a share in the long term] is NOT a peak but a new base off of which to drive further growth,” Pitzer wrote.

Stifel analyst Patrick Ho also raised his target price on Sunday, bumping it to $160 from $140. Ho also has a Buy rating on the stock. Applied’s higher valuation is warranted, he said, because Tuesday’s investor day will be positive for the stock.

He expects executives to outline a new financial model on Tuesday that highlights what the company is capable of in terms of earnings and cash flow generation. “We believe that its earnings leverage has been underestimated (including by us) and management’s update will showcase the continued improvements made on this front,” Ho wrote.

According to Ho’s calculations, the company should be able to produce earnings of about $8 a share, assuming annual revenue reaches $25 billion. At the moment, analysts expect earnings of $6 a share on sales of $21.7 billion for this year. Applied said that it expects to report its fiscal second-quarter results on May 20.

Of the analysts that cover Applied Materials, 25 rate it a Buy and four have a Hold rating. A single analyst advises investors to sell shares. The average target price is $143.73, which implies the stock will fall less than 1% in the next year.

Applied Materials is set to hold its investor day Tuesday, kicking off at 11 a.m. Eastern time.

Applied Materials shares have surged 242% in the past year as the Sox has advanced 128%. The

S&P 500 index

gained 64% in the same period.

Write to Max.Cherney@barrons.com