Tech stocks, which have rebounded remarkably this year, could be on the cusp of their worst quarter from a revenue perspective in over six years. Dismal top line guidance from industry giants such as Apple Inc. (AAPL), Intel Corp. (INTC), Nvidia Corp. (NVDA), and other large techs signals a sharp slowdown in tech sales, challenging bulls who argue that tech companies' underlying business models will outperform, as outlined by CNBC.

Thus far, 31 tech firms have issued negative revenue guidance, dramatically above the five-year average of 20, and marking the highest number of downward revisions since the fourth quarter of 2012, at 36, per FactSet data.

Why Tech Will Disappoint

  • 31 tech firms issued negative revenue guidance, compared to 5-year average of 20
  • Downward top line revisions at highest level since Q4 2012
  • 26% of tech firms issued negative earnings guidance, compared to 5-year average of 20.2%
  • IT worst off, with 26 companies lowering profit guidance, just 13 raising
  • Tech industry EPS to slip 10.7% in Q1 as big players like Apple, Intel, Nvidia report below expectations

Source: FactSet, Barron's

The tech sector, one of the worst performing last year, has made a sharp comeback in 2019. The Nasdaq Composite Index is up 14.6% through Wednesday afternoon, compared to the broader index's 11.4% increase over the same period. While some headwinds have subsided as trade tensions with China ease and the Federal Reserve takes a more dovish stance on interest rate increases, investors may be overlooking slowing top and bottom line growth in the red-hot sector.

Earnings Look Bleak, Too

Not only are tech companies lowering revenue guidance more than normal, but profit forecasts are also starting to look much less bright for tech stars. The trend has been in line with the overall market, as S&P 500 companies are forecasted to post a 3.7% decline in EPS, the first negative reporting period since Q2 2016. While the full year consensus is still for a 3.8% increase in earnings year-over-year (YOY), the number is trending lower, per CNBC.

As for tech in particular, 26% of companies in the sector have issued negative EPS guidance, compared to the five-year average at 20.2%, according to FactSet records. That marks the greatest percentage of tech companies issuing downgrades since the first quarter of 2016. Information technology looks worst off, with 26 companies lowering profit guidance, and just 13 raising bottom line forecasts. Overall, tech industry EPS are expected to slide 10.7% in Q1, dragged down by giants such as iPhone maker Apple and chip leader Intel.

While Apple has slashed its EPS forecasts from $2.95 to $2.39, and Intel from $1.01 to $0.87, investors don’t seem phased. Both of the companies have seen their share prices grow in the double digits this year.

Looking Ahead

The historically downbeat forecasts for Q1 aside, bulls remain optimistic regarding underlying fundamentals. Thanks to a handful of factors including Trump’s sweeping corporate tax cuts, U.S. computer and software makers saw profits jump 29% in 2018, leading analysts at firms such as Credit Suisse to suggest that lofty valuations are now reasonable.

“The ‘E’ in that P/E is growing so fast that the P/E just can’t keep up,” said Patrick Palfrey, equity strategist at Credit Suisse, in an interview with Bloomberg. “More so than any other sector, the success of technology companies or the Nasdaq has come from underlying strength of business models. That’s really where technology sits -- at the intersection of corporate profit success and how much someone’s willing to pay for it.”

Ultimately, while disappointing Q1 results may create a ripple across the tech space, growth-oriented investors are unlikely to stay away for long.