Three earnings reports this week have the potential to light a fire under the technology sector.
The reports come from Apple Inc., Microsoft Corp. and Amazon.com Inc. Each of the tech giants has a question mark hanging over it.
For Amazon, it's the usual query: When, if ever, will the goliath of e-commerce start producing sustainable profits?
Analysts expect the company, which unveils results on Thursday, to post a loss of 14 cents a share for the second quarter. On a more positive note, its revenue is forecast to surge to $22.4-billion (U.S.), nearly 16 per cent higher than a year earlier.
Amazon's ability to keep expanding sales at a double-digit clip is one reason its share price has soared 56 per cent so far this year. But some investors also seem to be betting that the company is getting ready, at long last, to reward shareholders with something more than vague promises of jam tomorrow.
Justin Post, an analyst with Bank of America Merrill Lynch, said in a report this month that Amazon is signaling a new willingness to relax its price-cutting discipline and start reporting significant profits.
If that does happen, expect the stock to burst even higher. It would be hard for investors to resist a profitable company with a seemingly impregnable position.
Amazon already dominates online retailing. One marker of its clout is the success of its Amazon Prime service, which offers free shipping to loyal customers for $99 a year. The program has signed up roughly 40 million members, according to research firm Consumer Intelligence Research Partners.
In addition, Amazon has become a leader in the fast-growing area of Web services, a business that caters to people who don't want the hassle of maintaining their own hardware or software. The company's Web service division allows customers to tap computing power located in remote servers known collectively as the cloud.
No wonder that 32 of 49 analysts rate Amazon shares as a "buy." Expect the fervour to swell if the company actually reports earnings this week.
While Amazon investors look forward to profit, Microsoft investors are looking backward. The pride of Seattle has churned out impressive earnings for years. The question hanging over the company is whether it can maintain its lush profits in a world where shrink-wrapped software is passé.
Microsoft is giving away Windows 10, the next version of its operating system, as a free upgrade to many users. In addition, it is laying off 7,800 people and taking a $7.6-billion non-cash charge as it tries to restructure the phone hardware business it bought from Nokia just last year.
As a result, Microsoft is expected to announce a loss of 42 cents a share when it reports quarterly results on Tuesday. But 22 of 43 analysts still term it a "buy," despite the stock's flat performance so far this year.
The company's low debt, high margins and aggressive new style under CEO Satya Nadella provide some solid reasons for investors to stick around. So does the company's substantial dividend, which delivers a 2.7 per cent yield at current prices.
Microsoft watchers will be watching this week's earnings call for signs of a payoff from the company's Surface tablet, which is being touted as a rival for laptops.
They will also be eager for the latest update on Microsoft's Azure cloud computing service, one of the prime competitors for Amazon's Web service. Microsoft's cloud sales – including subscriptions to Office 365, its online productivity software – more than doubled in the first quarter, to $1.5-billion, and investors hope for more good news on that front.
However, it will be hard for Microsoft to shine when it's compared to Apple, which also reports earnings on Tuesday. The iPhone maker's stock has risen 17 per cent so far this year and the Street loves its prospects: 42 of 55 analysts call it a "buy."
As usual, expectations are sky high. Consensus estimates call for Apple to make $1.80 a share for the quarter, a 41-per-cent leap from a year earlier. Its sales are expected to hit $49.3-billion, which works out to a 32-per-cent increase from the same quarter in 2014.
The question that looms over Apple is whether it can beat those lofty forecasts. It usually does. Over the past 10 years, it has surpassed expectations 37 times and missed only three times.
There is one reason for caution this week. More than a quarter of Apple's revenue comes from China. The country's cooling economy could chill purchases of Apple products. But if Asian sales remain strong, expect Apple's hot stock to grow even more incandescent.