The fact that Alphabet (NASDAQ:GOOGL) stock fell even though the company’s fourth-quarter results beat most earnings estimates should have surprised no one.
Investors believe that Amazon and Google are now mature. As a result, they think that Amazon stock and Google stock should be generating real returns, and investors plan to evaluate them based on their real returns.
Their future, it is believed, is similar to that of Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT), which both now produce steady dividends. Eventually, these investors believe, Google stock and Amazon stock will be evaluated based on their “total returns” and compared to high-dividend, “low-tech” companies.
The $1 Trillion Question
In early August, Apple stock was (briefly) worth over $1 trillion. Amazon stock followed in its footsteps a month later, but the market caps of both stocks have since fallen to slightly above $800 billion, with Apple holding a $10 billion lead in early trading today.
A $1 trillion market cap is hard to get your head around. It’s equivalent to the gross domestic product of Indonesia , for instance, and four times that of Egypt.
But $1 trillion is a number that screams “maturity,” so Wall Street no longer wants to value the FANG stocks based on their futures.
Amazon stock, for instance, now has a price-earnings ratio of “just” 81. The main reason why Amazon stock retreated in the wake of the company’s Q4 results was that its product sales grew “only” 8%.
This ignores the fact that product sales are the lowest-margin piece of Amazon’s pie. The company’s big profits come from Amazon Web Services and third-party sales, which do not require Amazon to take inventory risks. Subscription revenue, including Prime memberships, brought in nearly $4 billion during the quarter.
Analysts were flabbergasted at the reaction of Amazon stock. Some 40 of 46 analysts who follow AMZN stock still have “buy” ratings or an equivalent rating on the shares.
But Amazon stock still dropped over $100 per share in one day, from $1,727 before its earnings were announced to Monday’s low of $1,616. As of this morning, AMZN stock had rebounded to around $1,650.
The Sweet Smell of Success
The reaction of Google stock was similar. Google stock dropped as low as $1,116, after it had reached $1,140 the day before its earnings were announced. That represented a drop of 2%, from peak to trough, for Google stock. As of this morning, Google stock was trading around $1,130. Google stock declined yesterday and today even though GOOG beat analysts’ consensus revenue estimate by $500 million, and reported earnings per share of $12.77 against the consensus outlook of $10.86.
Analysts assume that Google can’t possibly keep bringing 10c of every dollar to the net income line, as it continues to roll out its own branded hardware, phones, voice interfaces and attached-security hardware. The company’s capital spending doubled last year to $25 billion and should rise slightly this year.
As Google, Amazon, and the other FAANG stocks grow, they’re buying real estate, building physical data centers and warehouses, and generally hardening the silos that drive their ever-widening market niches. But (and this is the most important but) they’re not going into debt to do it. Alphabet’s debt is $4 billion, against assets of $197 billion. Amazon has no long-term debt at all, as it’s funding its expansion entirely with its cash flow.
The Bottom Line
Nothing has risen to challenge the FAANG stocks outside of China and even Alibaba Group Holding (NASDAQ:BABA) is a fraction of Amazon’s size. Still, the rise of such international rivals is great protection against antitrust problems, as is Walmart (NYSE:WMT), which is still twice as big as Amazon.
Most of what’s happening right now is a fear of big numbers. Such numbers are, indeed, harder to grow than small numbers. But so long as the absolute numbers keep rising, as they still are, it’s hard to see the present dip as anything but an opportunity.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, BABA, MSFT and AMZN.