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FAANG Stocks Shed $100 Billion, But Apple Remains Sound

Tech

The so-called FAANG quintuplet of major technology and internet stocks has been badly hammered, turning one of the year’s hottest trades on its head after a key member of the group turned in a dismal earnings scorecard. The group dropped a cumulative $100 billion on Tuesday’s session after Google’s parent company, Alphabet Inc. (NASDAQ:GOOG), saw a pretty bad revenue miss in its Q1 print as well as the slowest growth clip in three years.

The internet and search giant reported revenue of $36.34B (+16.7% Y/Y) missing the consensus by $1.02 billion. Non-GAAP EPS of $11.90 beat by $1.74 yet GAAP EPS of $9.50 was $0.41 lower than Wall Street’s expectations.

On the call, Alphabet pinned the blame for the miss on tough comps, forex headwinds and unfavorable timing of ad product changes.

GOOG shares tanked 7.7 percent after the report, equal to market value of  a whopping $70 billion, its worst one-day loss since April 2010.

(Click to enlarge)

Source: CNN Money

The rest was lost by other FAANG members including Amazon Inc. (NASDAQ:AMZN), Facebook Inc.(NASDAQ:FB) and Netflix Inc. (NASDAQ:NFLX) after being caught up in what Mad Money host Jim Cramer termed as “guilt of association”.

Amazon’s and Facebook’s ad businesses have been growing like a weed, and the shortfall could be a sign they are giving Google a run for its money.

Where Alphabet’s war was lost

Alphabet’s report card was littered with misses. However, it’s important to note that the quarter included the impact from the $1.7 billion EU fine for anticompetitive practices.

Revenue breakdown:

  •         Google Properties, $25.7B (consensus: $26.26B);
  •         Google Network Members' Properties, $5.04B (consensus: $5.22B);
  •         Google Other, $5.5B (consensus: $5.67B);
  •         Other Bets, $170M (consensus:$172.2M).

Operating income was $9.3B, lower than the $10.78B consensus. Google’s moonshots aka “Other Bets” continued being a profit black hole after losing $868M, much higher than the consensus for $639.8M.

Alphabet’s sub-20-percent top-line growth was what spooked investors the most, which coupled with the company’s lack of full transparency--what exactly was this “unfavorable timing of ad product changes” the company alluded to—leaves plenty to be desired at the world’s largest online ad company.

Apple shines, again

Only one FAANG stock emerged unscathed–Apple Inc.(NASDAQ:AAPL). And that’s because the smartphone maker’s own scorecard and guidance, coming a day after Alphabet’s, did not disappoint.

Related: Positive Economic Data Weighs On Gold

Apple managed to beat on both  top- and bottom-line expectations, thanks to notable strength in its Services and wearable businesses. FY 19 Q2 revenue of $58.02B (-5.1% Y/Y) beat by $620 million while GAAP EPS of $2.46 beat by $0.10.

The most encouraging takeaway from that earnings call was that Apple has been successful in finding other business lines to replace its shrinking iPhone segment.

Apple’s legacy iPhone business has stalled globally, yet the company is becoming more adept at selling “Services”—a host of software products—to its installed user base of 900 million as well more wearables even to non-iPhone users. iPhone revenue fell 17 percent during the quarter but Services and wearables were able to take up much of the slack. Last quarter, Apple’s iPhone sales made up just 53.5 percent of sales down from 61.4 percent  a year ago after

Wearables revenue growth was particularly impressive after expanding 50 percent to hit $5.13 billion. The business is now the size of a Fortune 200 company--an impressive feat considering the first Apple Watch was launched just four years ago.

Apple’s wearables segment mainly consists of Apple’s smartwatch, though it’s a little fudged because it lumps the Apple Watch together with other smaller products such as Beats Headphones and iPods in the same bucket.

Most of Apple’s other segments performed well with revenue breakdown as follows:

  • iPhone, $31.05B (consensus: $30.93B)
  • iPad, $4.87B ($4.23B)
  • Services, $11.5B ($11.37B)
  • Mac, $5.5B ($5.90B)
  • Wearables and home, $5.13B ($5.03B)

Perhaps the biggest red flag in the otherwise healthy report was that the iPhone manufacturer saw its China business continue to shrink faster than expected. Apple recorded revenue of $10.2 billion in the Middle Kingdom, considerably lower than the $13 billion figure it reported a year ago.

The company though received a lift on the bottom line after its operating expenses clocked in at just $8.41 billion, considerably lower than its guidance for $8.5-8.6B. Apple also issued upbeat FY Q3 guidance as follows:

  • Q3 revenue from $52.5B and $54.5B (consensus: $52.10B)
  • Operating expenses in the $8.7B to $8.8B range (consensus: $8.54B).
  • 37% to 38% gross margin (consensus: 37.9%)

Analyst upgrades/downgrades

As expected, Wall Street chimed in with new price targets after the earnings calls.

Alphabet:

  • Jefferies-- maintained a Buy rating and a $1,450 Price Target
  • Morgan Stanley—maintained an Overweight rating but lowered PT from $1,500 to $1,425

Apple:

  • Morgan Stanley—Overweight rating, PT boost from $234 to $240
  • Piper Jaffray-- maintained an Overweight rating and raised PT from $201 to $230

By Alex Kimani for SafeHaven.com

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