Markets await Apple and Facebook earnings amid tech bubble warning

Apple's challenge is to keep profits growing. Photograph: John Moore/Getty Images

Hedge-fund manager David Einhorn declared on Tuesday, in a letter to investors in his Greenlight Capital, that 'we are witnessing our second tech bubble in 15 years.'

On Wednesday, after the markets close, Apple and Facebook will report their latest quarterly figures. The timing seems appropriate. Both companies are facing decreasing enthusiasm as investors like Einhorn become more skeptical of the high-flying promises of the technology sector.

In Facebook's case, investors will also be keen to hear about two major purchases it made in the last quarter, both of which had analysts and observers talking bubble. In February, Facebook bought social messaging service WhatsApp for $19bn, its largest ever purchase; in March it spent another $2bn on Oculus, a company specialising in virtual reality software.

After a rocky stock-market debut, Facebook has beaten analysts' top-line estimates for six quarters in a row, and analysts are expecting more of the same on Wednesday. The consensus forecast is that Facebook will report revenues of $2.36bn, up 62% from the year-ago quarter. Analysts polled by Thomson Reuters expect Facebook to report a net income of $613m for the three months ending March 31, compared to the $312m it reported in the same period last year.

The focus will be on mobile advertising, an area in which Facebook stumbled after its initial public offering in May 2012. Now more than half of its ad revenues come from mobile. Analysts will be keen to hear how much Facebook is charging for those ads. Last week Google reported the average price of its mobile ads fell 9% last quarter.

Now that the social network has more than 1.2bn users worldwide, some analysts have questioned how much bigger it can grow.

'Many commentators have pointed out how the site is becoming less popular among the young, and that the trend of being asked to become friends with your own grandparents on Facebook was a sign that the peak popularity moment had come and gone. In this environment, then, advertising revenue becomes key, as Facebook looks to make more money from those actually using its service,' said Chris Beauchamp, a market analyst at IG.

For Apple, the struggle is similar. Apple, once the wünderkind of Silicon Valley, has been steadily moving away from exceptionalism and towards normalcy, albeit a quietly profitable normalcy.

The company's challenge is to keep its profits growing and to assure investors that its future will be better than its somewhat troubled recent past.

Critics fear that Apple is getting near a saturation point with its two most popular gadgets, the iPhone and iPad. Apple sold 37.4m iPhones at this time last year, and 19.5m iPads. The company will have to do better on both counts.

But that growth may be hard to produce, and growing profits may prove even more difficult. This quarter, analysts surveyed by Thomson Reuters expected the company to announce $43.5bn in revenue for the first three months of the year - a few hundred thousand dollars less than last year. If the analysts are right, it would be the first decline in Apple's revenues in 11 years.

Apple is likely to introduce a new iPhone this September, with a larger screen, according to reports.

Still, it has failed of late to dazzle either consumers looking for the next must-have gadget, or analysts judging the company's financial health. It also has aggressive competitors, like Google, and video-streaming services from Netflix and Amazon are challenging iTunes' dominance over digital media.

While Apple has successfully faced down activist investors looking to change the company's use of its cash - among them big Wall Street names like Einhorn and Carl Icahn - it has not been dazzling recently either in terms of product offerings or the value of its shares. Icahn pushed the company to use some of its infamously large cash hoard of over $140bn to pay dividends and buy back its own stock. Apple conceded Icahn's point, and its reward was that its shares have risen 36% this year, to $529 - still well below the peak of $702 in September 2012.

Jefferies analyst Peter Misek said his sources suggested Apple is looking to increase the price of the iPhone 6 by $100 - 'an admission that there is no other game-changing device this year'.