The second quarter earnings season ramps up this coming week with results expected from technology heavyweights Apple (AAPL), Amazon (AMZN) and Google parent Alphabet (GOOG, GOOGL) — three of the market’s top four largest publicly-traded companies by market cap. Microsoft (MSFT), being the other, reported last week — albeit to mixed results, if judging by the stock’s negative 4% response.
Valuation concerns among the aforementioned mega tech stocks, namely the FAANGs, have been a popular theme. Beyond the FAANGs, there are also high-flyers such as Zoom Video (ZM), Shopify (SHOP), Peloton (PTON), Twilio (TWLO) and the rest of the so-called “stay-at-home” stocks that have dominated the market which are now being referred to as “bubbles.” An unfair reference, I might add, given that these companies have real businesses and are profitable.
Nonetheless, it appears that the rotation out of the mega cap and stay-at-home winners into stocks that are perceived as more “undervalued” has begun. On Friday tech stocks took a beating with the sector falling 1.2%, dragged down by earnings results from Intel (INTC) which — despite easily beating on both the top and bottom lines — got punished to the tune of 16% and sending the broader chip market lower. I’ve noticed a trend — one that we’ve seen before and can predict what the eventual outcome will be.
Over the past two weeks, investors, including some large funds, have been selling what they think are overvalued companies and are re-allocating their capital into stocks they think have been overlooked or are undervalued, particularly those that have been left out of the strong rally from the March lows. But with Covid infections still on the rise in states like Texas and Florida, the stay-at-home stocks will have no choice but to come back, particularly as they enable schools to teach remotely — whether through their service platforms or cloud offerings.
As the stay-at-home stocks re-emerge they will power the rest of tech higher, taking the entire market along for the ride. My advice is, until there is a vaccine and states can safely re-open, investors should stay with the winners that have benefited from the pandemic. That is not to say that they won’t go down, but knowing that their businesses (unlike restaurants) are well-insulated from the disruption that the pandemic would cause, they are much safer plays both on a relative and risk-reward basis.
As far as earnings this week? Here are the names to keep an eye on.
Starbucks (SBUX) – Reports after the close, Tuesday, Jul. 28
Wall Street expects Starbucks to lose 57 cents per share on revenue of $4.14 billion. This compares to the year-ago quarter when earnings were 78 cents per share on revenue of $6.82 billion.
What to watch: With offices closed and lounging in cafes seemingly a distant memory, there’s no question that the pandemic has disrupted worldwide coffee consumption habits, including the rising trend of consumers drinking more coffee at home. How will that impact Starbucks’ business model in the long term? That’s the main question the company will have to answer on Tuesday’s conference call with analysts. Last quarter Starbucks management cautioned that Q3 results could be weak, saying it expects the negative financial impacts to be “significantly greater” than in Q2 and possibly extend into Q4. With SBUX down 14% year to date and 17% over the past year, investors have seemingly taken the cautious approach.
Facebook (FB) – Reports after the close, Wednesday, Jul. 29
Wall Street expects Facebook to earn $1.37 per share on revenue of $17.35 billion. This compares to the year-ago quarter when earnings came to $1.99 per share on revenue of $16.89 billion.
What to watch: As with Google, the social media giant’s digital advertising business is expected to take a hit as companies scale back on spending due to the coronavirus. Aside from the impact of the recent boycott of its advertising business, investors will also focus on the company’s user growth and engagement metrics which are often the main drivers of the stock, namely its monthly active users and its average revenue per user. Facebook has topped consensus earnings expectations in each of the past 18 quarters, underlying an exceptional execution track-record. But with mounting regulatory pressure and other political headwinds taking a toll, will this be the quarter that its pristine quarterly execution takes a hit?
Wall Street expects Alphabet to earn $8.27 per share on revenue of $37.30 billion. This compares to the year-ago quarter when earnings came to $14.21 per share on revenue of $38.94 billion.
What to watch: Has the market exaggerated concerns about weak advertiser spending? That’s one the main questions investors will get an answer to when Google reports earnings. Social media and digital ad-related stocks have been under pressure due to ad-related headwinds as companies curtail their advertising spending during the pandemic-induced recession. What’s more, Google — as with several of its peers — is also facing regulatory pressure regarding alleged anticompetitive practices. Any outcome that reign in the market and pricing power of Google’s reach could make its revenues more unpredictable. But given the company’s exposure to various growth markets such as cloud computing and artificial intelligence, it’s hard to imagine any scenario where Google’s long-term success could be impeded in a meaningful way.
Amazon (AMZN) – Reports after the close, Thursday, Jul. 30
Wall Street expects Amazon to earn $1.68 per share on revenue of $81.05 billion. This compares to the year-ago quarter when earnings came to $5.22 per share on revenue of $63.40 billion.
What to watch: Since reaching their all-time high of $3,344 on July 13, shares of Amazon have lost as much as 14% and are now in correction territory. This comes amid what appears to be an ongoing rotation trade into value stocks and away from the high-growth stay-at-home winners. That said, the stock is still up more than 60% year to date and the pullback presents a buying opportunity, according to Credit Suisse which recently boosted their price target to $3,400. “The longer consumers remain under shelter-in-place, the higher the likelihood of the new behaviors learned during quarantine to become newfound habits,” noted the analyst. Nonetheless, AMZN shares have been down 8 of the last 10 sessions, suggesting investors are taking a wait-and-see approach.
Apple (AAPL) – Reports after the close, Thursday, Jul. 30
Wall Street expects Apple to earn $2.26 per share on revenue of $52.24 billion. This compares to the year-ago quarter when earnings came to $2.18 per share on revenue of $53.81 billion.
What to watch: It seems the market has grown bearish on Apple, which last week received a negative note from a Goldman Sachs analyst Rod Hall who referred to Apple’s valuation as “unsustainable.” The firm which had been underwater on Apple’s price movement, raised their price target to $299 from $263, which implies a 20% decline from current levels. Among other potential headwinds, Goldman cited slowing unit sales, ASPs, and unit growth. The firm also thinks not only may Apple delay its 5G iPhone release, the company is likely to avoid issuing guidance due to the pandemic. This is not the first time Goldman has downgraded Apple ahead of its earnings report. Back in April it didn’t work out very well for Goldman’s timing. Apple went on to crush its earnings results, sending its share price to all-time highs in the weeks that follow. But will this time be different?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.