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Tech stocks' tumble scares investors, but not analysts

Wall Street's "healthy market correction"

As some of the most popular tech stocks have rolled over badly in recent weeks, investors are running for the exits. Morgan Stanley notes that over the past week alone, U.S. equity outflows have totaled $7.5 billion, resulting in 54 percent of all year-to-date money that went into stocks now being pulled out.

Can't say I blame them, with harrowing declines underway in widely owned big-cap technology names like Facebook (FB) and Amazon (AMZN).

But equity analysts on Wall Street remain unshaken, shrugging off headwinds such as President Donald Trump's Twitter tirades against Amazon, production woes at Tesla (TSLA), and data privacy blowback at Facebook. Instead, they're seeing these companies' stock price downdrafts as creating a buying opportunity -- not an existential threat to earnings growth.

Just look at Tesla, which among the tech stocks probably faces the most dire situation: an ongoing cash burn, a massive 123,000-unit Model S recall, another Autopilot-related fatality, Model 3 production that has slipped behind promises and an ill-advised April Fool's Day joke about bankruptcy by CEO Elon Musk. Tesla shares are down 25 percent from their late-February high.

Tesla plagued by production delays, crash probe, recalls

Yet analysts at Jefferies and Standpoint Research have both upgraded their rating on Tesla in recent days. Looking ahead to the company's earnings report on May 2 -- with a forecast of a $3.23 per share loss on revenue of $3.5 billion -- Jefferies analyst Philippe Houchois is looking for management to take "drastic action on guidance and funding to restore credibility." He believes "most of the issues" that have weighed down shares are arguably reflected in their price.

On a broader scale, according to FactSet, analysts just increased their earnings estimates for companies in the S&P 500 for the first quarter and the 2018 calendar year by a record amount. The quarterly EPS estimate increased by 5.4 percent to $36.24.

This is unusual because earnings estimates normally deteriorate during a quarter as lofty estimates and management hype are pulled back. On average, earnings estimates have declined by 3.9 percent during a quarter. Over the past 10 years, the average drop has been 5.5 percent.

The first-quarter 2018 increase penciled in is the largest since FactSet started tracking quarterly earnings estimates in 2002. The full-year estimate increased by 7.1 percent, which is a record since the data started in 1996.

It's worth noting that the bulk of the earnings bump came in January. In March, analysts cut their quarterly estimates by 0.3 percent and dropped the full-year estimate by 0.2 percent.

So analysts aren't totally immune to the fear and uncertainty in the air. They're just much less sensitive to it and continue to hold the most optimism toward tech stocks out of all 11 major sectors. Among their most highlight rated stocks is Amazon, with 96 percent of analysts maintaining a "buy" rating and just 4 percent rating it a "hold."

Despite the price decline and President Trump's anti-Amazon bluster, not a single analyst believes it's time to sell. 

Anthony Mirhaydari

Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.

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