Sometimes, the big guys get the press for a reason. The six largest publicly traded companies have a combined market cap of more than $5 trillion – roughly equivalent to the gross domestic product of the Japan, the world’s third-largest economy. In some respects, the stock market is little more than a performance reflection of its very largest members.
A look at TipRanks’ Stock Screener quickly reveals the stocks we are talking about, and the names are no surprise. Apple and Microsoft are at the top, valued at over $1 trillion each. We’ll be looking at several of their peers –the news-makers in the tech industry that draw investors in. They’ve reached this peak for similar reasons: positive disruption of established markets, proven success generating revenues, enormous returns for investors. And even at their scale, Wall Street still sees room for them to grow. Let’s dive in.
In the recent Q3 report, Amazon reported sharp earnings losses despite a modest gain in revenues. Total sales rose 24% to $70 billion, against a forecast of $68.8 billion, while EPS missed the estimates, coming in at $4.23 versus the $4.62 predicted. The EPS miss comes after Amazon has spent $1.6 billion over the past two quarters on expansions of the one-day delivery program. In a move that is sure to make investors a bit nervous, the company also announced that capital expenditures will increase in Q4, to $1.5 billion, due to warehouse and product line expansions.
It’s a testament to Amazon’s underlying strength that management could post a loss due to high spending – and then announce plans for even higher spending. This is a company with a firm business model and plenty of revenue to cover the expansion plans. But more important, from an investor’s perspective, the capital expenditures are money well spent. Expanding and improving one-day delivery, expanding warehouses, and improving product lines will all positively impact the bottom line once they are fully implemented.
So, even though AMZN shares have underperformed the markets in 2019, gaining 18% against the broader S&P’s 23% increase, the stock still shows the potential that has made Jeff Bezos the richest man alive.
Setting out the bullish case clearly is Deutsche Bank’s Lloyd Walmsley, who writes, “We would be buyers of Amazon shares post disappointing 4Q guidance, which reflects the typical seasonal step-down in growth… While operating income guidance was meaningfully below consensus, and buyside expectations, we think the clear benefits of 1-day Prime visible in 3Q results give investors comfort the investment is worth it, particularly given the view that Amazon will eventually ring out efficiencies in its delivery and the AWS and advertising profit juggernauts continue along at healthy growth rates…” Walmsley’s $2,150 price target implies a healthy upside of 21% for AMZN. (To watch Walmsley's track record, click here)
Doug Anmuth, 5-star analyst from JPMorgan, is also upbeat about Amazon’s future. Giving the stock a $2,200 price target, he says, “We believe Amazon’s flexibility in pushing first-party vs. third-party inventory and its Prime offering both serve as major advantages in its retail business, and its multi-year head start in the cloud has led to a ~60% US market share. Amazon is also starting to show more profit, with its high-growing AWS and Advertising revenue streams also its most profitable.” His price target indicates confidence in a 24% upside potential for Amazon.
All in all, the e-commerce king is without question a Wall Street favorite, considering TipRanks analytics indicate AMZN as a Strong Buy. Out of 35 analysts polled in the last 3 months, all 35 are bullish on the stock. With a return potential of nearly 25%, the stock's consensus target price stands at $2,182.36. (See Amazon's price targets and analyst ratings on TipRanks).
Shifting our gaze to China, we find Amazon’s major international competitor. Alibaba is China’s largest retail website, and while China’s government policy of restricting international internet access means that Western observers are less familiar with it, it’s important not to lose sight of some basic facts.
BABA’s growth has been impressive. The stock’s 36% year-to-date gains are double those of Amazon, and BABA has gained 107% in the last three years. BABA reported fiscal Q2 2020 earnings earlier this month, and the $1.83 EPS clobbered the forecast of $1.55. Revenues, at $16.7 billion, showed a 40% gain from the year-ago quarter. The company’s Core Commerce segment was up 40% for the period; its smallest segment, Cloud Computing, gained a hefty 64%. Overall, BABA’s growth makes it a viable competitor for Amazon – but it’s important to remember that Amazon has overhead costs that Alibaba lacks.
On a further positive point for Alibaba, the company hit record numbers on the November 11 Singles Day sales, the biggest annual online shopping event in China. The first minute and eight seconds of the shopping day saw Alibaba pull in $1 billion, and the company hit $12 billion by the end of the first hour. Total sales for the day, $38 billion, were, for the third year in a row, a new record.
UBS analyst Jerry Liu sees a happy future for Alibaba, which he describes in his recent report on the stock: “We believe the company can maintain high-30% revenue growth due to strong user engagement… with new drivers (live streaming, second hand goods, feed ads) potentially accelerating China Commerce revenue growth next year. We also believe… investors have gotten too negative on Alibaba relative to competitors.” Liu recommends buying BABA stock now, and his $210 price target implies a 14% upside. (To watch Liu's track record, click here)
Writing from Deutsche Bank, analyst Eileen Deng describes the path forward for Alibaba: “Alibaba's Sep Q results featured a nice beat on revenue... We sensed a great effort moving towards a disciplined investment strategy... There will be more focus on user retention, cross-selling, and then reinvestment out of discretionary profit. By realizing stronger synergies, we become more confident for an EBITDA profit growth in the next few quarters.” Deng set a $223 price target, suggesting that BABA has room for 19% growth.
Like Amazon, Wall Street’s analysts are unanimous on BABA. The Strong Buy consensus rating is based on 17 "buys" set in recent weeks, while the $229 average price target indicates a 24% upside from the current trading price of $185. (Find out how the Street’s average price target for Alibaba breaks down)
Facebook’s reputational problems in the area of consumer data protection and privacy are well known, and founder Mark Zuckerberg’s attempts over the past two years to address the issue brought him several rounds of merciless mockery – ironically, on the very social media networks he had pioneered. Earlier this year, Facebook suffered an earnings hit when the company had to set aside $5 billion in cash to cover a record-setting FCC fine related to the problems with data privacy.
But with a market cap of $555 billion, annual revenues exceeding $55 billion, and net income of $22 billion, Facebook had the resources to pay that fine, swallow the immediate loss, and move forward. Despite the mockery heaped on Zuckerberg, the company has made visible efforts to improve data security – although the company still faces difficulties relating to perceptions of political censorship. Zuckerberg has said that FB will simply allow anyone to post any political idea – but in today’s highly charged socio-political environment, it’s probably not possible for him to please everyone.
Facebook’s shares have reacted well to the company’s efforts at reputation management and damage control. The tech giant suffered first and worst in the 2H18 downturn, losing 42% of its value before bottoming out in December. Since then, the stock has shown a solid recovery, climbing 55% from its lowest point. While it’s not back at peak values yet, and has shown high volatility since May, FB is up 44% year-to-date.
A solid Q3 report underscored the company’s gains. Daily active users, a key metric, climbed to 1.62 billion – and yes, that’s billion; Facebook reaches 22% of the world’s population every day through its family of apps. Revenues and EPS, at $17.65 billion and $2.12 respectively, both beat the forecasts.
Youssef Squali, 5-star analyst with SunTrust Robinson, lays it out in his recent report on FB shares: “We remain bullish on FB after another solid quarter, beating on all financial/ user metrics amidst intense regulatory/media scrutiny… We believe Facebook has become the foundation of the social web… Facebook is still in its early growth phase, in our view, and given its enormous reach and time spent statistics, coupled with relevance, targeting, and social context, we believe the company will capture a disproportionately high percentage of brand ad dollars over the next 2-3 years.” Squali’s price target of $250 implies an upside of 31%. (To watch Squali's track record, click here)
Facebook’s Strong Buy consensus rating is not unanimous, but it is based on 27 "buy" ratings set in recent weeks. The 3 "holds" and 1 "sell" are reminders of the company’s recent problems, but don’t detract from optimistic the outlook. Shares are priced at $195, and the average price target of $235 is well above the July 2018 peak of $235. Overall, FB has a 21% upside potential. (Discover how the overall stock-price forcecast for Facebook breaks down here)