Amazon was one of the most obvious winners of last week’s Facebook, Apple, Amazon, Netflix, and Google (FAANG) quarterly reports, besting analyst expectations by making nearly $2bn (€1.6bn) in profits during the three months to Christmas.
Its shares closed at $1,390 last Thursday but have skyrocketed since then to $1448.20 after Wall Street analysts from Credit Suisse to Morgan Stanley and JP Morgan raised their price target for shares in the online marketplace.
Facebook likewise reported higher revenue $12.97bn (+47%) and adjusted earnings of $2.21 per share, despite recording its slowest ever daily user growth. Many speculate the sluggish user growth is a result of CEO Mark Zuckerberg’s decision to show fewer viral videos, which “reduced time spent on Facebook by roughly 50 million hours every day”.
The flurry of FAANG results also included Apple’s first quarter figures, which saw the Silicon Valley titan set a record high for quarterly revenue of $88.3bn and quarterly earnings per diluted share of $3.89.
The firm’s CEO Tim Cook called it “the biggest quarter in Apple’s history,” noting that its base of active installed base of phone users had grown 30% in two years to 1.3 billion in January.
Despite the record shattering figures, shares in the tech firm were down following news that iPhone sales of 77 million were 1% weaker year-on-year. Although Apple’s smartphone sales outshined the market as a whole, this left some investors understandably nervous, especially considering the amount of fanfare drummed up for its latest model, the iPhoneX, which it hailed as the future of the business.
Comparatively speaking, Google also struggled against some of its FAANG counterparts. Profits of $6.8bn fell $200m short of analyst expectations of $7bn after higher costs offset an increase in advertising sales. However, revenue for the period was 24% higher than the previous year at $32.3bn.
Winners and losers
There’s quite a lot separating the rapid growth enjoyed by the illustrious, glossy FAANGs from your run-of-the-mill American corporation listed on the NYSE.
As Alison Porter, portfolio manager on the Janus Henderson Global Technology fund, notes: “Technology stocks have continued to outpace broader equity markets in 2018. Together Apple, Amazon, Google, Facebook and Microsoft have a market cap value of $3.6trn and a net cash balance of just over $365bn.”
Not only that but “technology has accounted for the vast majority of earnings growth of the S&P 500 in the last 10 years,” she adds.
Nowhere are the differences between traditional corporations and their flashier FAANG ilk more pronounced than in this last set of quarterly reports, which Porter says “epitomise a virtuous circle of cash generation, investment and share gains – part of the technology sector flywheel”.
But what separates an Amazon from an Apple? After all, the former’s share price took off even after it forecast that its operating income for Q1 2018 would be between $300m to $1bn, below analyst consensus of $1.5bn.
Again, Porter claims it goes back to that ability to embody the “technology flywheel” in action, a quality which she thinks Amazon best exemplifies.
She says: “Amazon is increasingly viewed as a brand, a portfolio of companies and services in e-commerce, advertising, media, logistics, IT infrastructure and more recently healthcare. Amazon reinvests its cash quickly and investors get rare glimpses of its potential long term profitability. Investors in the company appreciate that traditional short-term earnings metrics do not capture the value of the future growth potential at the company.”
Being a technological disruptor is a plus but long-term profitability is still the end game here. Part of that includes backing the right projects. In this respect, the FAANG stocks have very different strategies – Amazon has expanded its e-commerce empire by branching out into new territory with M&A activity (Whole Foods); Alphabet has invested in a host of smart firms like self-driving car company Waymo; Apple has its next gen products.
Although Google parent company Alphabet missed the mark with its latest set of results, Thomas Fitzgerald, associate fund manager at EdenTree Investment Management, still believes in the long-term investment case for the home of the most widely used AI search engine.
“Overall, 2017 was a strong year for the company as revenue growth accelerated for the second consecutive year, margins remained robust and management confirmed meaningful progress in a lot of initiatives including public cloud,” he says.
“We continue to believe that the long-term investment case for Alphabet remains attractive due to the company’s scale and ever-expanding platform of digital services, leaving it well-positioned to benefit from the ongoing secular growth tailwinds in search and online video advertising, as well as the continual growth in the mobile web.”
But if hugely successful companies like Apple and Google are churning out mixed results, what does that say about the prospects for other large, mid and small-cap firms?
Miles Eakers, chief market analyst at Centtrip, speculates that a dip in iPhone sales could signal a larger problem, not just for the FAANGs, but the US market more widely.
“Low iPhone sales could signal a broader negative outlook for other US companies this year. Elevated US stock market prices are showing optimism around future earnings. But should earnings disappoint, we will expect a long-awaited correction in risk appetite.
“We have already seen this in the US S&P 500, which slumped last night. The benchmark index reflecting the top 500 companies in America closed at 2,821.98 – a drop of almost 2% from its record highs of 2,872.87 earlier in the week.”
However, Porter is less pessimistic. She believes that the FAANGs, in particular, will benefit from president Trump’s corporate tax overhaul.
“Within the results, the global tech titans were all keen to stress the investments their companies were making in the US, including job creation and training plans. Apple recently announced a $350bn contribution to the US economy over the next five years ($5bn in advanced manufacturing fund and 20k jobs), Amazon are hiring more than 100,000 people, Alphabet plan to open five new data centres in the US and Facebook plans to double its capex to over $14bn. All of which is in keeping with the idea behind US corporate tax reform and will likely appeal to the current administration.
“However, it is more than just political appeasement – tax reform is facilitating easier use of cash from overseas and higher levels of capex and R&D, as well as likely increases in returns to shareholders. This is the flywheel pushing technology share gains in full motion.”