FAANG Earnings Season Laggards: Buying Opportunity?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="2^nd quarter earnings are slowly passing the peak of excitement with 75% of public US equities done reporting by the end of the week. As a whole, the market was almost indifferent to Q2 earnings with the S&amp;P 500 trading flat over the past 2 weeks. FAANG, on the other hand, has not fared as well over the last 11 trading days, with Facebook FB down 3.2%, Amazon AMZN down over 6%, and Netflix NFLX tumbling over 11%.” data-reactid=”11″>2^nd quarter earnings are slowly passing the peak of excitement with 75% of public US equities done reporting by the end of the week. As a whole, the market was almost indifferent to Q2 earnings with the S&P 500 trading flat over the past 2 weeks. FAANG, on the other hand, has not fared as well over the last 11 trading days, with Facebook FB down 3.2%, Amazon AMZN down over 6%, and Netflix NFLX tumbling over 11%.

Not all of FAANG fell short of the hype though. Alphabet GOOGL had a positive price action, with shares appreciating 6.7% over the past 2 weeks. Apple AAPL just released earnings after the bell and the market is reacting positively with shares up over 4% in after-hours trading.

In this article, I will discuss the FAANG Q2 laggards (NFLX, AMZN, FB) and will follow it up with the Q2 winners (GOOGL, AAPL).

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix (NFLX)” data-reactid=”21″>Netflix (NFLX)

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix got crushed when it released its 2^nd quarter results on the 17^th of July. Subscription growth slowed this past quarter significantly, and the platform actually lost subscribers domestically. The firm was forecasting subscription additions of 5 million and only achieved 2.7, which is the worst growth figure in 3 years.” data-reactid=”22″>Netflix got crushed when it released its 2^nd quarter results on the 17^th of July. Subscription growth slowed this past quarter significantly, and the platform actually lost subscribers domestically. The firm was forecasting subscription additions of 5 million and only achieved 2.7, which is the worst growth figure in 3 years.

The missed forecast was associated with regions that had experienced a price increase. The decline in US subscribers is a signal that Netflix is timing price increases inappropriately.

Decelerating subscription growth is a bad sign for a business that’s been seen as the gold standard in an industry that is becoming increasingly saturated. Netflix needs to brace itself for Disney+ DIS, which will be priced at almost half the price of the comparable Netflix package.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix management is confident that the subscriber increase in Q3 will offset the slowdown this quarter. The catalyst being new seasons of hit Netflix shows like Stranger Things and The Crown as well as a Scorsese film that will be released called 6 Underground.” data-reactid=”25″>Netflix management is confident that the subscriber increase in Q3 will offset the slowdown this quarter. The catalyst being new seasons of hit Netflix shows like Stranger Things and The Crown as well as a Scorsese film that will be released called 6 Underground.

With significantly slowed growth in an increasingly competitive space, I would be very hesitant to purchase NFLX at its current excessively high multiple.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Amazon (AMZN)” data-reactid=”27″>Amazon (AMZN)

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Amazon has fallen 4% since its earnings release on the 25^th of July, but is still up 26.4% for the year. The company beat sales expectations but missed on EPS for the first time in 2 years, inducing shareholder concern.” data-reactid=”28″>Amazon has fallen 4% since its earnings release on the 25^th of July, but is still up 26.4% for the year. The company beat sales expectations but missed on EPS for the first time in 2 years, inducing shareholder concern.

Amazon’s cloud segment, AWS, also missed estimates, decelerating the growth of this segment quicker than expected. AWS is anticipated to be the primary growth driver moving forward. This larger than expected slowdown caused uneasy AMZN sentiment in the market.

Amazon has been struggling with short term costs due to its investment in one-day delivery domestically and internationally. Analysts are anticipating that Amazon’s high margin AWS cloud business will make up for the thinning margins in e-commerce. 70 to 80% of operating income is expected to be derived from AWS by the end of this year.

Prime Day was an enormous success and the single largest event in Amazon history with sales surpassing Black Friday and Cyber Monday combined. Expect the benefits of this event to be reaped in Q3.

I believe that these short-term margin cuts will not affect the long term growth of the company, and as AMZN’s price falls the buying opportunity ripens.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook (FB)” data-reactid=”33″>Facebook (FB)

2.1 billion people around the world use one of Facebook’s family of services daily, while 2.7 billion utilize one of these at least once a month, whether it be Instagram, WhatsApp, Messenger, or Facebook. Facebook’s daily active user (DAU) and monthly active user (MAU) expansion have been slowing down in recent quarters with only 8% year-over-year growth in Q2 compared to the 11% in Q2 last year and the 14% in 2017.

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