3 Tech Stocks That Could Surprise This Earnings Season

With earnings season starting, several Foolish contributors share their thinking on why tech names such as Analog Devices, Corning, and Amazon.com are poised to surprise investors with their upcoming reports.

Andrew Tonner
Andrew Tonner, Jamal Carnette, CFA, and Steve Symington
Oct 13, 2015 at 6:42AM
Technology and Telecom

Although we maintain that the long term matters far more than short-term performance in saving for a successful retirement, a successful or disappointing earnings report can loom large over the stocks we watch here at the Fool. Winners can be handsomely rewarded, and even disappointing earnings reports can create attractive entry points for patient investors.

As earnings season picks up steam, we recently surveyed a number of our Foolish contributors to identify a tech stocks they believe could beat expectations in the weeks to come. Small-scale chipmaker Analog Devices (NASDAQ:ADI) could see a surge in revenue if rumors that it won placement in the iPhone 6s prove accurate. Industrial materials power Corning (NYSE:GLW) could once again demonstrate why it's one of the best-run companies in its space. And red hot e-commerce juggernaut Amazon.com (NASDAQ:AMZN) shows no signs of slowing down from its torrent of innovation and top-line growth.

These brief excerpts represent a mere snapshot of what makes these names worth investors' attention. Read on to find out why these three tech stocks could surprise investors in their upcoming reports.

Andrew Tonner (Analog Devices): Along with much of the tech community, I remain intrigued by niche semiconductor firm Analog Devices for one primary reason -- the iPhone 6s.

Analog Devices manufactures the chips that power the much-touted Force Touch sensors in the Apple Watch, a placement that numerous credible teardown reports have confirmed. And with the inclusion of Force Touch as the "flagship" feature of the iPhone 6s, many believe Analog Devices could see a substantial spike in revenue as iPhone-related revenue begins to appear in its upcoming report. However, this is no sure thing. Although many prominent iPhone 6s teardowns have yet to be published, a few preliminary reports do not explicitly list Analog Devices among the component suppliers for Cupertino's latest smartphone. Identifying component manufacturers can prove quite vexing, so this doesn't definitively mean Analog Devices was left out in the cold for the iPhone 6s.

This does represent an important key to successfully examining a possible Apple component supplier like Analog Devices -- supplying components to the iDevice company can be risky business. With the potential to almost instantly add millions, if not billions, of revenue to a supplier's top line, Apple understands and uses its financial weight to its advantage. This situation has created multiple boom-and-bust scenarios for companies such as Cirrus Logic, Omnivision Technology, and others. Analog Devices reports quite late in earnings season, so be sure to watch for potential fireworks in its report on Nov. 24.

Steve Symington (Corning): Of all the tech companies with a habit of underpromising and overdelivering, I think Corning has the greatest chance to maintain its impressive streak. Last quarter marked Corning's fourth consecutive quarterly earnings beat -- a performance driven by a combination of aggressive share repurchases and strong operational execution, the latter of which included healthy growth from its Optical Communications business, and cost reduction efforts at its core Display Technologies segment.

That said, Corning's revenue last quarter also came in light at $2.52 billion -- slightly below expectations for $2.54 billion -- hurt primarily by ongoing foreign exchange headwinds. But those headwinds should prove temporary, and Corning's top- and bottom-line growth should see a nice boost once they subside. In the meantime, Corning is hard at work positioning itself for future growth with innovative projects. Take "Project Phire," for example, a sapphire-esque offshoot of Corning's popular Gorilla Glass product that hasn't formally launched yet, but had already won its first order on an unnamed wearable device as of last quarter's report.

Keeping in mind that shares currently trade around 11.7 times next year's expected earnings, just before that report Corning's board also approved a new $2 billion share repurchase program. So all things considered, when Corning releases third-quarter results later this month, I would be thoroughly surprised if the shares of the glass products specialist don't jump after exceeding analysts' earnings expectations yet again.

Jamal Carnette (Amazon.com): While it may be a seemingly unconventional pick for this roundtable, because it's widely considered a retailer, Amazon is quietly becoming a tech powerhouse. If you own the company, you should be as excited about its Amazon Web Services, or AWS, host of Web and cloud-based solutions as about its high-profile online marketplace.

Recently, the company disclosed that AWS is now a business with a $7.3 billion annual run rate. Of course, that's not a large part of Amazon's revenue haul of the past four quarters ($96 billion, inclusive of AWS ), but that's not what makes Amazon Web Services so important to investors. When it comes to profit profile, the business punches above its weight.

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For example, during the first half of 2015, Amazon reported that its AWS division produced segment operating income of $655 million on revenue of $3.39 billion, producing an operating income margin of 19%. As a comparison, both of Amazon's retailing divisions (North America and international) reported segment operating income of $1.13 billion on $42.5 billion of net revenue.

At these profit profiles, Amazon would have doubled its retail operating income if it reported $5.8 billion in AWS (or a run rate of $11.6 billion, as this is a half-year's returns). And although this projected figure is 71% higher than Amazon's first-half AWS revenue, the company grew AWS revenue 81% on a year-on-year basis. AWS doesn't appear to be fully valued into the stock, and the company could outperform estimates as a result thereof.