On the way and sure to be influential
I have written several times in E-MorningCoffee about the FAANG companies, or FAMAG companies, or whatever the various acronyms are that you might see from time to time referring to the big US tech companies. It is fitting to provide a short update given that the five best known tech giants – Apple (AAPL), Meta (Facebook, META), Alphabet (Google, GOOG), Microsoft (MSFT) and Amazon (AMZN) - all report earnings this week. I will state up front that I would not be a buyer or seller of any of these ahead of earnings[1]. On one hand, valuations have come down considerably, making the stocks more reasonably priced. On the other hand, earnings will likely also remain under pressure, and further declines worse than expectations in top-line or bottom-line growth – either absolute or in the growth rate (that justifies a higher multiple) – will be poorly received by investors. Having said this, all of these companies have a formidable set of qualitative attributes that make them worthy of inclusion in a portfolio (s/t price).
Upcoming earnings – timing and consensus expectations
The table below contains the timing of earnings releases as well as analysts’ expectations for revenues and EPS. This data was obtained from YahooFinance.com and Fidelity Investments.
What’s happened since November?
On November 8th, 2021, I wrote an article in E-MorningCoffee entitled “Enjoy these stocks if you own them: tread carefully if you don’t”. In this article, I touched on various valuation metrics for the five FAMAG stocks (as they were then known) plus Nvidia (NVDA), Tesla (TSLA), Netflix (NFLX) and Shopify (SHOP), all strong performers – at least at the time – and very much in the next tier of tech companies. My conclusion then was that you should hold the larger names if you already own them, but not to dip in yet if you did not because the valuations made all of the companies very expensive compared to the market generally and to each stock’s historical valuation.
Since the time I wrote that article on November 5th 2021, the NASDAQ Comp has fallen 25.9%. In addition to the market weakening more generally, there have also been a series of company-specific events this year, many of which have not been favourable to the the tech giants. These company-specific issues, along with nose-bleed valuations, have also been – in a circular way – contributors to the decline in US stock indices, since the five FAMAG companies comprise a material portion of the S&P 500 index, even now. Some of the company-specific events included:
Netflix released very poor 1Q2022 results, losing subscribers for the first time in over a decade. More concerning, the company indicated that it expected to lose 2m subscribers in the second quarter (after losing 200k in the first). The stock fell 35% on April 20th after the announcement. (As an aside, 2Q22 subscriber losses, announced when NFLX released 2Q2022 results on July 19th, were not as severe as projected in April.)
Advertising-dependent companies, mainly Meta Platforms (Facebook, Instagram, WhatsApp) and Alphabet (Google), have suffered as advertising spend has decreased. META in particular had a poor 4Q21 due to a big miss on subscriber growth / users, some brought about by changes in privacy settings by Apple. META shares fell 26% on February 3rd following the release of its 4Q21 results.
Amazon served up a nasty and surprising package of results for 1Q22 on April 28th, moving the company to a bottom-line loss for the quarter. In addition to higher costs (inflation) and a bloated labour force (pandemic-legacy), Amazon had lower top-line growth and suffered from supply-chain disruptions. The company also had an unusual $7.6 bln unrealised loss on the mark-down of EV company Rivian in which it owns a stake.
Tesla has been negatively affected by supply-chain disruptions and a shutdown in March at its Shanghai production facility due to COVID, although the company slightly beat consensus expectations last week when it reported 2Q2022 results (here). Apple reported that it too has experienced similar production-related delays from caused by supply chain disruptions, a topic I imagine we will hear more about this week.
Many of the global tech giants have sufferred from (the unforesen) Ukraine-Russia conflict; raging inflation, especially with respect to wages and energy costs; and supply-chain disruptions due to outbreaks of COVID, especially in China.
Three companies announced stock splits after I penned the November 5th 2021 article: GOOG on Feb 1st (20-for-1 effective July 15th); AMZN on March 9th (20-for-1 effective June 6th); and SHOP on April 11th (10-for-1 effective June 29th).
An anticipated recession could further negatively affect results this quarter and the remainder of 2022. Also, the strong US Dollar will negatively affect earnings since all of the companies report their financial results in US Dollars. All of the FAMAG companies – along with NVDA, TSLA and NFLX – have very material international sales as they are global giants, which will create further headwinds as far as sales and negative translation effects.
Updated tables from the November 8, 2021 article
I updated two tables from the earlier article which I have included below, comparing market cap and valuation metrics from November 5, 2021, when I peened that article, to July 22, 2022.
With respect to these tables, note the following:
The aggregate market value of the FAMAG stocks has declined 22.1% since November, from $9.7 trillion in aggregate to $7.6 tillion. The FAMAG stocks as a percent of the S&P 500 has declined from 23.8% to 22.7% during this period, although these five names still remain very influential in the performance of the index (as well as the NASDAQ), and vice-versa.
Apple (AAPL) has been the company which has declined the least amongst the FAMAG companies, and Meta Platforms (META) has declined the most. AAPL is the only company now with a market cap in excess of $2 trillion.
Of the non-FAMAG names, SHOP and NFLX have been the worst performers. SHOP has declined so significantly that it hardly mertis inclusion any longer amongst so-called “tech giants.”
Valuations based on past and projected earnings, as well as a multiple of revenues, have declined quite sharply for every one of the companies. Simultaneously, valuation multiples for the S&P 500 index have also declined.
META and GOOG still have PEG ratios under the average of the S&P 500. AMZN and NVDA are the companies with the highest PEG ratios, making them potentially more vulnerable to earnings misses.
Conclusion
To say there is a lot riding on this quarters’ earnings releases for the tech giants is an understatement. Netflix and Tesla already reported, and both were fortunately in line with or better-than-consensus expectations, although the headwinds I discussed earlier inevitably affected top- and bottom-line growth. As you can see in the first table, only three of the FAMAG companies – GOOG, MSFT and AMZN – are expecting this quarter’s EPS to be better than the last, although none materially. META and AAPL are expecting lower Q-o-Q results. With the exception of MSFT, all are projecting this quarter’s results to be lower than the same quarter in 2021.
There are plenty of risks on the horizon for the tech giants, including:
declining consumer and business spending (e.g. on advertising) as the US – and the global – economy edges closer to a recession,
on-going effects (sales and translation effects) of a strong US Dollar,
tight labour market, wage inflation and legacy staffing issues resulting from the pandemic,
high energy costs, and
supply chain disruptions caused by COVID-shutdowns in China and Ukraine-Russia war.
The stage for this round of FAMAG earnings was most certainly not set by the dismal results from Snapchat (SNAP) and Twitter (TWTR) on Thursday evening, so investors remain very much on edge. The sentiment in the equity market more broadly will be very dependent upon this round of earnings vis-à-vis consensus expectations for the tech giants. These tech companies’ stocks are certainly less expensive than they were eight months ago, so investors might very well sniff opportunities. As I said at the onset, I personally wouldn’t buy or sell going into this round of earnings unless you suddenly develop real conviction for one reason or another. Should earnings surpirse on the downside and the shares get hammered, it very well could present a nice entry point for investors. If this occurs and you decide to take the plunge, make sure your time horizon is long term. The pandemic “momentum trade” of big tech stocks being up every day, week and month is long past!
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[1] For disclosure, I are currently long AAPL, AMZN, MSFT, GOOG, SHOP and NVDA.