Are you ready? This week's onslaught of earnings includes three FANG stalwarts, Facebook, Alphabet and Amazon. And the results are likely to set the tone for the rest of this earnings season. So far 15.3% of the S&P 500's market cap has reported 2Q results. According to Credit Suisse, earnings are beating by 6.8%, with a whopping 81% of companies exceeding their bottom-line estimates.
“No matter what the economic circumstances are, no matter what the backdrop is, there’s this dynamic that companies like to lowball and analysts like to give them headroom,” Ed Keon, chief investment strategist at QMA told CNN. “The fact that numbers are coming in better than expected — it’s been the case for decades now.”
Meanwhile the FANG group is trading toward the high-end of its 5-yr historical range. That’s despite increased US regulatory pressure, with tech executives recently appearing in front of the House Antitrust Subcommittee to discuss dominant platforms, market power, and innovation. Although the Street isn’t dismissing these concerns completely, analysts are nonetheless sticking to their ‘buy’ calls.
Top Wedbush analyst Daniel Ives expects business model tweaks and potential DOJ/FTC fines in a worst-case scenario rather than forced breakups of the underlying businesses.
The analyst writes: “We reiterate our belief that this broader Beltway vs. Big Tech battle is more bark than bite… The further analysis of the business models from these FAANG names will cause some near-term uncertainty, but ultimately we view it as a positive, potentially acting as a catalyst for more technology innovation/diversification over the coming years.”
With this in mind, let’s now take a look at what the Street is expecting for these three key stocks this week:
Facebook Inc (FB)
Facebook is out with its second quarter number this Wednesday, July 24. Going into the print the mood is bullish. This is a stock with a firm ‘Strong Buy’ analyst consensus, racking up 35 buy ratings in the last three months. That’s versus just 4 hold ratings during the same period. Meanwhile the average analyst price target stands at $222 (12% upside potential).
“After a turbulent 2018, the scandalous news flow has continued this year, but the stock is climbing this tall wall of worry” wrote five-star Monness analyst Brian White. He reiterated his FB buy rating ahead of the print with a $250 price target, suggesting 26% upside potential.
The analyst is optimistic about the company’s growth trajectory, especially with its new cryptocurrency Libra. “Facebook is laying the foundation for the next era of growth with stories, increased privacy, innovations such as Libra, more e-commerce and new frontiers” the analyst told investors. Essentially, Libra enhances the Facebook ecosystem, says White, providing entry into the financial services industry and supporting increased e-commerce that in turn can drive more ad spending.
For the second quarter he is modeling for 24% revenue growth, to $16.44 billion. That’s just below the Street at $16.51 billion. Encouragingly, White also believes FB will exceed his EPS estimate of $1.82 (the Street is also more confident at $1.87). Nonetheless, the analyst notes that the 2Q:19 revenue growth projection represents a sharp deceleration from the incredible 42% growth delivered last year.
In terms of the all-important user numbers, White forecasts total DAU (daily active users) of 1.601 billion, up 9% year-over-year. He is anticipating the same rate of growth (9%) for monthly active users, which would take the number to an eye-watering 2.438 billion (up 3% from last quarter). And looking ahead, the analyst is hoping for 3Q:19 revenue guidance of $16.92 billion (up 23%; Street is at $17.05 billion) with EPS of $1.83 (Street is at $1.85).
Alphabet Inc (GOOGL)
Close on the heels of FB’s earnings report comes Alphabet’s big day on July 25. Like Facebook, GOOGL boasts a ‘Strong Buy’ Street consensus with 27 buy ratings vs 5 hold ratings. These analysts see the stock surging 18% in the coming months to reach $1,334.
Five-star Cowen & CO analyst John Blackledge sees prices rising even higher to $1,400. For the quarter he is expecting similar revenue growth to last quarter for O&O (owned and operated) sites of 19% year-over-year. That’s in-line with Street estimates. “We delivered robust growth led by mobile search, YouTube, and Cloud with Alphabet revenues of $36.3 billion, up 17% versus last year, or 19% on a constant currency basis,” Alphabet Chief Financial Officer Ruth Porat said last quarter.
However top-rated Barclays analyst Ross Sandler believes a revenue beat is possible- and spies a favorable set-up especially for long-term investors. “Checks suggest Sites may be in-line to a tad better than 1Q's 19% ex-fx growth, which would surprise consensus. A few of the factors that drove the deceleration in 1Q persist in 2Q (ie - Youtube clean-up), but others should have less impact (travel Easter shift, Olympics, etc)” he wrote in a July 9 report. Additionally, recent UX changes could help 2H based on our checks, the analyst told investors.
As a result, Sandler is modeling for $27.7 billion, or +18.8% ex-fx, for sites, and $37.5 billion for overall Alphabet revenue, with $10.28 in GAAP EPS. As for the rest of the year, the Barclays analyst remains a upbeat about GOOGL’s potential, writing “Regulatory tape-bombs are likely to continue, but at 23x 2020E EPS with optionality in many areas, we like the setup into 2H where we expect trends to pick up.”
Amazon.com Inc (AMZN)
Amazon is also out with its earnings report on July 25. Ahead of the print, AMZN remains one of the Street’s favorite stocks. This is a stock that has managed to score 35 buy ratings in the last three months, with only one analyst published a neutral hold rating. And even with shares trading at a lofty $1,964, the Street still sees 15% upside potential for the coming months. “AMZN is our top mega-cap long idea heading into 2Q – you own the name into retail revenue growth acceleration regardless of margin compression, full stop” cheers Barclays’ Ross Sandler.
Stifel Nicolaus’ Scott Devitt echoes this positive outlook. Note that this analyst is ranked in the Top 50 out of over 5,200 tracked analysts for his strong stock picking skills. “We expect continued strength in Amazon’s high-margin businesses, AWS and Advertising, which should continue to be a tailwind for operating margin and allow the company to invest more heavily in its retail capabilities, including one-day delivery” the analyst tells investors.
He is expecting 2Q:19 revenue estimate of $63.0 billion (with 20% year-over-year growth), above consensus and near the high-end of the guided range. For AWS revenue, Devitt is forecasting at $8.5 billion (39% y/y growth), in line with the Street’s expectations, driven by continued momentum in enterprise migrations. That’s with operating income of $3.55 billion (5.6% margin), below consensus (5.9% margin), but near the high of guidance thanks to AWS efficiencies and advertising scaling.
If we look ahead to 3Q, Devitt expects management to guide revenue above expectations driven by a strong Prime Day (items sold up ~75% y/y). However he does caution that margin guidance could fall below the Street expectations. The analyst cites investments in one-day shipping, international, and AWS as responsible for the drag.
Nonetheless the bullish thesis remains firmly intact: “Amazon is well-positioned as the leader in retail/cloud, and should continue to gain share in the advertising market as it adds new tools/services, makes strategic acquisitions, and leverages its valuable consumer data” concludes Devitt. The analyst reiterated his AMZN buy rating on July 19 with a $2,300 price target (17% upside potential).