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FAANG Earnings Season Laggards: Buying Opportunity?

Daniel Laboe

2nd quarter earnings are slowly passing the peak of excitement with 75% of public US equities done reporting by the end of the week. As a whole, the market was almost indifferent to Q2 earnings with the S&P 500 trading flat over the past 2 weeks. FAANG, on the other hand, has not fared as well over the last 11 trading days, with Facebook FB down 3.2%, Amazon AMZN down over 6%, and Netflix NFLX tumbling over 11%.

Not all of FAANG fell short of the hype though. Alphabet GOOGL had a positive price action, with shares appreciating 6.7% over the past 2 weeks. Apple AAPL just released earnings after the bell and the market is reacting positively with shares up over 4% in after-hours trading.

In this article, I will discuss the FAANG Q2 laggards (NFLX, AMZN, FB) and will follow it up with the Q2 winners (GOOGL, AAPL).

Netflix (NFLX)

Netflix got crushed when it released its 2nd quarter results on the 17th of July. Subscription growth slowed this past quarter significantly, and the platform actually lost subscribers domestically. The firm was forecasting subscription additions of 5 million and only achieved 2.7, which is the worst growth figure in 3 years.

The missed forecast was associated with regions that had experienced a price increase. The decline in US subscribers is a signal that Netflix is timing price increases inappropriately.

Decelerating subscription growth is a bad sign for a business that’s been seen as the gold standard in an industry that is becoming increasingly saturated. Netflix needs to brace itself for Disney+ DIS, which will be priced at almost half the price of the comparable Netflix package.

Netflix management is confident that the subscriber increase in Q3 will offset the slowdown this quarter. The catalyst being new seasons of hit Netflix shows like Stranger Things and The Crown as well as a Scorsese film that will be released called 6 Underground.

With significantly slowed growth in an increasingly competitive space, I would be very hesitant to purchase NFLX at its current excessively high multiple.

Amazon (AMZN)

Amazon has fallen 4% since its earnings release on the 25th of July, but is still up 26.4% for the year. The company beat sales expectations but missed on EPS for the first time in 2 years, inducing shareholder concern.

Amazon’s cloud segment, AWS, also missed estimates, decelerating the growth of this segment quicker than expected. AWS is anticipated to be the primary growth driver moving forward. This larger than expected slowdown caused uneasy AMZN sentiment in the market.

Amazon has been struggling with short term costs due to its investment in one-day delivery domestically and internationally. Analysts are anticipating that Amazon’s high margin AWS cloud business will make up for the thinning margins in e-commerce. 70 to 80% of operating income is expected to be derived from AWS by the end of this year.

Prime Day was an enormous success and the single largest event in Amazon history with sales surpassing Black Friday and Cyber Monday combined. Expect the benefits of this event to be reaped in Q3.

I believe that these short-term margin cuts will not affect the long term growth of the company, and as AMZN’s price falls the buying opportunity ripens.

Facebook (FB)

2.1 billion people around the world use one of Facebook’s family of services daily, while 2.7 billion utilize one of these at least once a month, whether it be Instagram, WhatsApp, Messenger, or Facebook. Facebook’s daily active user (DAU) and monthly active user (MAU) expansion have been slowing down in recent quarters with only 8% year-over-year growth in Q2 compared to the 11% in Q2 last year and the 14% in 2017.

This slowdown in user growth was inevitable, with roughly 63% of the internet accessing world using at least one of Facebook’s services at a minimum of once a month. User growth will soon be a product of world population growth.

Facebook has been able to partially offset this slowing user growth trend with the appreciation of average revenue per user (ARPU), although policy headwinds could negatively impact this growth with regulatory changes focused on targeted advertising.

The FTC slapped Facebook with a $5 billion civil penalty, the largest fine in the history of the agency. The fine was related to negligence with handling user data as well as ‘deceptive’ communication to consumers related to user data utilization. Along with the massive fine, the FTC required Facebook to implement new privacy processes to ensure that this misstep doesn’t occur again.

Regulatory overhang remains a concern for Facebook moving forward. The company’s growth is decelerating, and the reliance on ARPU for topline appreciation increases. If regulatory bodies inhibit Facebook’s ability to produce targeted advertisements, the company’s growth could be significantly hampered.

Analysts remain bullish on the stock and its momentum so far this year shows little signs of slowing down. EPS estimates have been rising and this stock sits at a Zacks Rank #2 (Buy)

Take Away

Earnings season is always one filled with surprises. Unfortunately, for Facebook, Amazon, and Netflix shareholders the surprise was negative.

I am bearish on Netflix with its subscription deceleration surfacing even before the formidable entrance of Disney+, which will undoubtedly take some share from Netflix. I would wait for a further drop in this stock before thinking about putting on a position

Amazon is a seemingly unstoppable force of prolific growth. Being not only the largest online retailer in the world but also the largest cloud provider of IaaS and PaaS. AMZN becomes an increasingly tempting buy every dollar it drops.

Facebook is the largest social media conglomerate in the world, along with being the owner of the world’s two most used messaging app. Regulatory issues continue to be a concern moving forward but analysts remain bullish on FB.

 

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