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Is FMAANG Overrated?

Sejuti Banerjea
·10-min read

There’s no doubt that big tech is helping support the market. Facebook FB, Microsoft MSFT, Amazon AMZN, Apple AAPL, Netflix NFLX and Alphabet GOOGL are not just large cap stocks. They are up a respective 17.0%, 33.6%, 65.4%, 27.3%, 52.6% and 11.9% year to date while the S&P 500 is down 2.7%.

Obviously, the pandemic-induced digitization has served them well. People have had more time (and inclination) to connect and sell on Facebook, watch movies on Netflix, listen to Apple’s Music, play games on Xbox, read books bought on Amazon and catch their daily dose of infotainment on YouTube.

While kickbacks for smaller ecommerce players like eBay EBAY and Shopify SHOP continue, Amazon of course gained big time.

Those among the FMAANG with working tools like Azure, Office, AWS, Google Cloud, Macs, Chromebooks and smartphone solutions also gained.

Moreover, since the pandemic was a global feature and all of these companies are global suppliers, the benefits were multiplied.

Regulatory concerns are however weighing down these stocks. In particular, Jeff Bezos, Mark Zuckerberg, Sundar Pichai and Tim Cook are scheduled to answer questions from a government antitrust committee on Jul 27. There’s also growing bipartisan support for amendments to Section 230, which has thus far protected companies with online platforms like Facebook and YouTube from prosecution for objectionable content on their platforms.

Facebook

The social media company has gotten itself into the middle of a deep controversy about the content it allows on its platform and the people/organizations it allows as fact checkers. This has led some of its larger advertisers to temporarily quit the platform, as pressure from human rights groups continues to mount.

But the issue also brought to light the broad base of Facebook advertisers that make a Facebook boycott somewhat ineffective. Some have estimated that these large companies contribute around 5% of its advertising revenue. The rest comes from a large number of small and medium-sized sellers, who have already spent time and money building their relationships and businesses on the platform. Their investment in the platform makes this customer base extremely sticky, especially because of the need for a digital front in the current operating climate.

As a result, Facebook stock has been somewhat resilient to the pressure.

Its numbers also look good. The company is expected to grow earnings 11.8% this year and 34.2% in 2021, despite a downward revision to estimates in the last 7 days (to account for the shift in big spenders). Its surprise history is spotty, averaging -10.2% in the last four quarters.

However, the June quarter Zacks Earnings ESP (Expected Surprise Prediction), which compares the Zacks Consensus Estimate to the Most Accurate Estimate, is positive. This generally happens when the most recent estimates are higher than the Zacks Consensus Estimate. If the Zacks Rank for a stock with positive ESP is #3 (Hold) or higher, there are good chances of a positive surprise when it reports on Jul 29.

Facebook shares are currently ranked #3. So if the ESP remains positive going into the announcement, sending shares higher, it would make sense to buy the shares.

Microsoft

While catering to the growing demand for its work-related tools, including its communication and collaboration software, Microsoft is venturing out into new areas.

In May for example, it launched Microsoft Cloud for Healthcare, which it said was a “first of many" custom cloud offerings with the stated goal of improving overall health outcomes. It was not unexpected given the challenges thrown up by the pandemic, but it’s good to see the company grab new opportunity.

It was also recently reported that Microsoft is in the market to acquire AT&T’s WB Games (the Warner Bros. Interactive Entertainment unit). This will add to its already considerably large stable of games and boost gaming revenues.

There was a bit of negative news flow about plans to shut down its retail operations, but these were never really that significant for Microsoft, so they’re unlikely to have much of an impact on its results.

Microsoft’s numbers are encouraging-

It is expected to grow earnings 20.0% this year and 9.4% in the next. The Zacks Consensus Estimate for both years has edged up in the past week. While the company has consistently topped the Zacks Consensus in the last four quarters at an average rate of 12.1%, its negative ESP for June quarter earnings is a slight concern at this point. However, the ESP is a fluid number, so it’s worth keeping an eye on as the company heads into its fourth-quarter earnings announcement on Jul 16.

Microsoft shares carry a Zacks Rank #3, so if the ESP turns positive it would make sense to accumulate the shares.

Apple

Apple’s business is still dependent on its cash cow, the iPhone. But the company continues to build the installed base of devices, which naturally has positive implications for its burgeoning services business. Not only that, it is one of the most successful wearables companies, a market it conquered by coming up from behind.

And as far as the iPhone is concerned, this is a quiet period despite the launch of the low-end gen 2 SE in China and India. The party will really begin in the second half, after it launches the new flagship device because some of the installed base is pretty old and it’s past time for an upgrade.

So while there’s likely to be a negative pandemic impact as well, it’s probably too soon to go bearish on Apple, since like the others, it too has benefited from the rapid digitization, work from home and other trends. The picture should be clearer after the company reports on Aug 4.

The numbers definitely don’t look too bad with earnings expected to grow 3.6% this year and 23.8% in the next. The Zacks Consensus Estimate for the Zacks Rank #3 stock has edged higher over the past week. The surprise history is decidedly positive with the preceding four quarters’ surprise averaging 10.6%. The ESP indicator hasn’t done well with respect to this stock.

Amazon

Amazon’s success is tied to its leadership position in retail ecommerce and cloud infrastructure markets, both of which were beneficiaries of the pandemic.

Even when some markets allowed shipment of essentials alone, the fact that traditional retailers were mostly closed made this a roaring business for the company. It’s extremely unlikely for Amazon to lose any ground that it has gained because it has a history of being extraordinarily good at retaining customers. So sure, smaller marketplaces may have gained too, but Amazon is likely to be the long term champ.

And this goes for the cloud business as well. Those altering modus operandi for the pandemic are investing in new tech. So they too are unlikely to jump away quickly.

Let’s take a look at the numbers. While double-digit revenue growth is forecasted for both 2020 and 2021, earnings are expected to drop 13.1% this year before nearly doubling to $38.40 next year. This is likely because infrastructure has to be scaled up very rapidly within a short timeframe to accommodate the significantly higher level of demand.

Amazon’s surprise history is spotty because the company typically doesn’t say much about the timing of investments, which makes it harder to model results. But it currently has an uncharacteristically positive ESP for June quarter results that it will report on Jul 23. So let’s see. The shares carry a Zacks Rank #3.

Netflix

The Netflix story is similar to the others, with the first quarter already seeing a subscriber addition of 16 million and low levels of churn (comparable to periods before the price increase). The international business remains the major contributor and also the area where it is investing heavily. Management expects second quarter subscriber adds to be 7.5 million, which is also up from last year. The second half is expected to decline as stay-at-home orders phase out.

comScore data shows that Netflix remains the top streaming app in terms of at-home numbers of hours viewed. Netflix grew its share 1.5 points to 26.7% in a market where the top five account for around 80% market share. Engagement should remain strong as management has already said that it doesn’t anticipate any disruption in content supply for the rest of the year.

Analysts have started speculating about whether there could be another price hike given the growing levels of engagement, despite increasing competition from YouTube, Hulu, Amazon Video and Disney+. In fact, Cowen & Co. analysts led by John Blackledge, in their monthly survey of about 2,500 U.S. consumers, concluded that 55% don’t mind a price hike, up from 47% in December. Also 60% of respondents streaming more than 7 hours a week don’t mind a price hike, up from 52%. The analysts think there could be an opportunity to raise prices in 2021 or 2022. However, price increases may not be possible if the employment situation doesn’t improve.

The company is expected to grow earnings 55.7% in 2020 and 34.7% in 2021. The Zacks Consensus Estimate for the current year is up a penny in the last 7 days. The average positive surprise in the four preceding quarters is 48.7% despite the fact that there was a small miss in the last quarter. Heavy investment in content has led to a huge debt load, resulting in a negative net cash position and a debt cap ratio of 62.8%.

The Zacks Rank #3 stock has a positive ESP, so a positive surprise is expected when it reports results on Jul 16.

Alphabet

The last of the sprawling tech stocks is Alphabet, has seen some benefits from the pandemic. But with governments across the world trying to disrupt its dominance and the American government attempting the same, sentiments on the stock have started dwindling. The only positive, if it materializes at all, is a gain from Facebook’s fallout with large advertisers. But since most big companies split budgets between platforms, any gain is uncertain, especially in the current soft environment.

The Zacks Consensus Estimate for 2020 shows an earnings decline of 16.1% this year, followed by a 33.1% increase in the next although revenue is expected to increase in both years. Both 2020 and 2021 estimates dropped half a point in the last 7 days. In the last four quarters the company topped estimates as often as it missed although it averaged +4.9%.

Although the ESP for the June quarter is positive, the shares carry a Zacks Rank #4 and are therefore not recommended at this time.

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Click to get this free report Microsoft Corporation (MSFT) : Free Stock Analysis Report Amazon.com, Inc. (AMZN) : Free Stock Analysis Report Apple Inc. (AAPL) : Free Stock Analysis Report eBay Inc. (EBAY) : Free Stock Analysis Report Netflix, Inc. (NFLX) : Free Stock Analysis Report Facebook, Inc. (FB) : Free Stock Analysis Report Alphabet Inc. (GOOGL) : Free Stock Analysis Report Shopify Inc. (SHOP) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research