How Did the FAANG Stocks Do This Quarter?

The FAANG stocks are as hot as ever. Read More...

The FAANG stocks did much to buoy markets in yesteryears. While less of a phenomenon today because of investments for continued growth, they are still a bunch of companies with massive reach, market dominance, huge prospects and the capacity to move markets. So although some analysts might allude to financials or industrials, FAANG stocks remain hot as ever.

So their earnings reports are worth a second look-

Facebook FB

Facebook is different from the other two social media companies in that it is the dominant platform doing everything that they do and more. So there is far greater depth in its monetization, with initiatives testing business communication and ecommerce, and payments, on top of the core advertising model. In advertising too, it isn’t just selling the newsfeed (“town square” in Zuckerberg’s words) but also Watch (a video sharing platform) and stories (what Zuckerberg calls the “living room,” something the company stole very effectively from Snap).

Numbers-

EPS of $0.85 was much lower than the Zacks Consensus Estimate of $1.66 mainly because of the $3 billion provision for expected settlement charges with the FTC.

Reported revenue of $15.08 billion was higher than the Zacks Consensus Estimate of $14.97 billion.

The Zacks Consensus Estimate for 2019 is down a penny to $7.02 in the last 7 days, down 6.6% in the last 30 days.

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Read More on Facebook and others: How Are Social Media Companies Doing This Quarter?

Amazon AMZN

Leading ecommerce company Amazon reported quarterly numbers that didn’t disappoint.

The business appears to be maturing, as evident from these numbers-

North America-ecommerce year-on-year sales growth slowed from 46% in 1Q 2018 to 17% in 1Q19.

International-ecommerce slowed from 21% to 16%

AWS was down from 48% to 42%

Advertising/other slowed from 132% to 34%

North America sales growth deceleration is partially on account of the law of large numbers, no doubt.

Regulatory challenges in India are largely behind it, so International growth may be expected to pick up.

AWS growth remains encouraging and new customers continue to trickle in helped by geographical expansion.

Advertising/other appears past the initial phase with any significant additional growth likely to come from increasing rates as the company facilitates better targeting and measurement through improved tools and provided it can convince advertisers that the platform is equal if not better than other leading platforms like Facebook and Google.

North America operating margin improved from 3.7% to 6.4%.

International went from -4.2% to -1%.

AWS grew from 25.7% to 28.9%. AWS margins are expanding despite its being a highly capital intensive business and requiring significant sales and technological support.

Execution appears solid as margins have expanded across the board although there was deceleration in revenue growth.

Guidance isn’t all that exciting, as some of the spending for expansion purposes will resume in the second quarter and continue through 2019. International expansion, implementation of free one-day shipping for Prime members, physical store expansion, computing infrastructure for AWS and content acquisition/creation are primary areas of investment. Spending is commensurate with a growth company, so decelerating growth rates are something to keep an eye on.

Numbers-

EPS of $7.09 topped the Zacks Consensus Estimate of $4.61.

Reported revenue of $59.70 billion was higher than the Zacks Consensus Estimate of $59.69 billion.

The Zacks Consensus Estimate for 2019 is down a penny to $26.59 in the last 7 days.

The shares carry a Zacks Rank #3 (Hold).

Apple AAPL

Apple’s second quarter revenue and earnings were both better than expected.

iPhone and Mac sales were down 17.3% and 4.6% respectively, but iPads, wearables and services grew 21.5%, 30.0% and 16.2%, respectively. Mac sales will likely pick up with the new product, so the main point of weakness was really iPhones, and that too in the Greater China region.

Apple has multiple issues in the Chinese market and these problems are unlikely to go away any time soon. First, there is real competition from many strong local brands. Second there has been some anti-Apple sloganeering and campaigning related to the trade war that may leave a tail depending on what the U.S. trade agreement with China brings.

Third, Apple has premium pricing. Fourth, China already has flourishing services companies, for chat, commerce, payments and other things. So for Apple, China remains by and large an iPhones business and in any case, without the installed base, it can’t sell many services anyway.

The company expects improvements because it is already reducing prices in China where necessary. Besides, it has a trade-in program that accepts not just iPhones but those from Chinese players as well, which might help it pick up some share. Cook also believes that the Chinese government’s stimulus to boost consumer goods sales will help.

The other major takeaway from the earnings report is the continued strength in wearables that surprisingly for Apple, is kind of under-hyped. Apple has become a leader in the Watch category and is also prominent in the headphones category. This is a business with $20 billion+ annualized sales and growing. It’s already bigger than iPads and more or less on par with Macs. So there’s every chance of its becoming the hardware growth lever for Apple.

As far as the services business is concerned, Apple said it now has 1.4 billion installed devices, which is a positive. It also has big plans for further investment in content and payments that should help the business grow.

Share buybacks will continue to support the EPS and help offset dilution from stock based compensation.

Numbers-

EPS of $2.46 topped the Zacks Consensus Estimate of $2.37.

Reported revenue of $58.01 billion was higher than the Zacks Consensus Estimate of $57.55 billion.

The Zacks Consensus Estimate for 2019 is up slightly to $11.47 in the last 7 days.

The shares carry a Zacks Rank #3 (Hold).

Netflix NFLX

Netflix, the most illustrious video streaming company with the largest user base in the U.S., is rapidly expanding overseas.

The company’s fortunes are still tied to growing the user base, since it charges a fixed subscription rate (due for a hike in May) and relies on original content as its primary growth strategy. That user base grew stronger than expected in the last quarter with 1.74 million net additions in the U.S. (1.38 million consensus) and 7.86 million internationally (6.52 million consensus).

Estimated subscriber additions for the next quarter were however just 5 million, lower than the 5.4 million consensus and 5.45 million added in the year-ago quarter. The number was disappointing enough to send shares crashing, although management may have been a tad conservative on account of the promised rate hike. But it’s worth noting that rate hikes haven’t had such a negative impact in the past.

There was also another negative data point, i.e. free cash flow. While investors were looking for positive news on that front, management said that investments in real estate and other infrastructure were a drag and higher cash taxes related to the change in the corporate structure also didn’t help. So 2019 cash flow will be -$3.5 billion with the promise of improvement now pushed to 2020 onward.

Numbers-

EPS of $0.76 topped the Zacks Consensus Estimate of $0.57.

Reported revenue of $4.52 billion was higher than the Zacks Consensus Estimate of $4.49 billion.

The Zacks Consensus Estimate for 2019 is down 15.8% to $3.35 in the last 30 days.

The shares carry a Zacks Rank #3 (Hold).

Alphabet/Google GOOGL

Alphabet’s results disappointed Wall Street, although revenue and earnings were both ahead of our estimates. What’s more, revenue grew 16.7% off a $30 billion base, which is huge by any standards. Regardless, the shares were battered afterward.

Google property ad revenue grew 16.7%, network property ad revenue grew 8.5%, other revenue (including cloud, Play and hardware) grew 25.1%. APAC grew 31% at constant currency, followed by other Americas 21%, U.S. 19% and EMEA 16%.

Breaking from the tradition, cost per clicks actually grew 5% with a 9% decline in paid clicks. Impressions grew just 5% despite a 14% decline in cost per impression. These are the metrics that may have thrown investors. The company’s attempts to clear up fake and harmful content on YouTube (sounding somewhat like Twitter-style censorship) likely impacted its results. But it could ease regulatory issues in some countries.

The $1.7 billion EU fine that Google will no doubt challenge was charged in the quarter.

The business remains extremely robust and growth will continue to come from multiple fronts because all the major Google services have a billion+ users. Amazon doesn’t appear to have had much of an impact on ad revenue yet and Google is in any case much bigger than the shopping ads it sells. Prospects for the Other Bets segment are bright with drone-based deliveries and self-driving cars slated to join Verily (the healthcare business) soon.

Look for increasing investments to drive long-term shareholder value.

Numbers-

EPS of $11.90 topped the Zacks Consensus Estimate of $10.57.

Reported revenue of $4.52 billion was higher than the Zacks Consensus Estimate of $4.49 billion.

The Zacks Consensus Estimate for 2019 is up a couple of cents to $47.07 in the last 7 days.

The shares carry a Zacks Rank #3 (Hold).

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