Google’s Earnings Lead the FAANG Pack

Earnings - Google’s Earnings Lead the FAANG Pack

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Wall Street’s gyrations this week were something to behold as the so-called FAANG stocks — Facebook parent company Meta Platforms (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix Inc. (NASDAQ:NFLX), and Google parent company, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — reported their quarterly earnings announcements and sent the markets on a wild ride.

After three days of gains, the NASDAQ Composite plunged 3.7% on Thursday, its biggest single-day loss since September 2020, the S&P 500 dropped 2.4%, its worst fall in almost a year, and the Dow Jones Industrial Average slid 518 points.

Interestingly, Facebook’s dismal earnings report was the culprit behind the NASDAQ decline, as it missed analysts’ fourth-quarter earnings expectations and issued weak guidance for the first quarter.

Facebook shares plummeted 26% on Thursday, shaving over $232 billion from its market capitalization and fueling the largest single-day drop in the U.S. stock market’s history.

Meanwhile, Apple, Google and Amazon’s latest results were nothing short of spectacular and show they may continue to dominate the market.

Now, the reason you’ve been seeing these wild swings in the market is because these trillion-dollar FAANG stocks are given so much weight in indexes like the NASDAQ-100 and the S&P 500. It can be a crapshoot because many don’t really give good guidance.

There’s lots of news to digest from these FAANG earnings reports, including Google’s stock split and Amazon’s surprise earnings beat, so let’s use today’s Market360 to dig in.

Netflix (NFLX) — Announced Earnings Jan. 20

The video streaming service brought in earnings of $1.33 per share, down over 5% from the year prior but 61.5% better than Wall Street’s consensus estimate for $0.82 per share.

Revenue of $7.7 billion was 16% higher than a year prior and about in-line with Wall Street’s expectations.

The company reported it added 8.3 million users, below its internal target of 8.5 million, but beat analysts’ estimates for 8.2 million. Looking ahead, the company said it expects to add 2.5 million new subscribers in the first quarter, well below roughly the 4 million it added during the first quarter of 2021, not to mention analysts’ forecasts for 6.9 million new subscribers.

Netflix admitted in its letter to shareholders that increased competition from leading streaming services helped lead to the slowdown.

“Consumers have always had many choices when it comes to their entertainment time — competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering,” Netflix said. “While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”

Shares plummeted over 21% the day after the company released its fourth-quarter announcements, marking Netflix’s worst day since July 25, 2012. The company’s stock price continued to drop until famed investor Bill Ackman of Pershing Square Capital Management purchased more than 3.1 million shares over a week ago, making the firm a top 20 holder in Netflix.

Shares rebounded briefly, but are still down over 32% this past month.

Here’s how Netflix looks in my Portfolio Grader tool.

As you can see, the company earns a Total Grade of “D,” a Quantitative Grade of “D” and a Fundamental Grade of “C,” which makes it a sell.

Apple (AAPL) — Announced Jan. 27

Apple had its largest single quarter in terms of sales ever, bringing in $123.9 billion, up 11% from the previous year and besting Wall Street’s consensus estimates for $118.5 billion by 4.5%.

First-quarter earnings of $2.10 per share topped last year’s number by 25% and beat analysts’ expectations of $1.89 per share by 11%.

iPhone sales of $71.6 billion were up 9% year-over-year (YOY) and topped estimates for $68.3 billion. Services revenue climbed 24% YOY to $19.5 billion, and beat estimates for $18.6 billion. Mac revenue rose 25% YOY to $10.9 billion, beating estimates for $9.5 billion.

In fact, only iPad revenue was down, about 14% YOY to $7.3 billion compared to estimates for $8.2 billion.

As it’s done since the start of the pandemic, Apple didn’t provide forward guidance. However, CEO Tim Cook stated during a CNBC interview: “What we expect for the March quarter is solid YOY revenue growth. And we expect supply constraints in the March quarter to be less than they were in the December quarter.”

The company did say it is still feeling the impact of the global semiconductor shortage, which I discussed yesterday. Legacy chips, or the older ones used in power management systems and display drives in particular have been an issue for the company, Cook said.

Apple shares have climbed 9% since the company reported its first-quarter results.

Apple gets an “F” for its Earnings Momentum Grade a “C” for its Fundamental Grade, but its Quantitative Grade of “B”, representing institutional buying pressure under the stock, bumps up its Total Grade to a “B” in my Portfolio Grader.

Alphabet Inc. (GOOG, GOOGL) — Announced Earnings Feb. 1

Google has emerged as a market leader after reporting stunning fourth-quarter results after the markets closed Tuesday.

Revenue of $75.3 billion was 32% higher than a year ago and topped Wall Street’s expectations for $71.8 billion by 4.9%.

Earnings of $30.69 per share was 38% higher than a year prior and bested analysts’ expectations for $27.28 per share by 12.5%.

Net revenue, which deducts traffic acquisition costs, was $61.9 billion, topping estimates for $59.3 billion. Traffic acquisition costs increased 28% to $13.4 billion.

Internet search and other revenue jumped 36% YOY to $43.3 billion, compared to estimates for $41 billion. Meanwhile, cloud computing sales climbed more than 45% from the prior year to $5.5 billion, just shy of analysts’ estimates.

YouTube advertising revenue soared 25% YOY to $8.6 billion, which fell below analysts’ expectations for $8.8 billion.

“Q4 saw ongoing strong growth in our advertising business, which helped millions of businesses thrive and find new customers, a quarterly sales record for our Pixel phones despite supply constraints, and our Cloud business continuing to grow strongly,” said CEO Sundar Pichai.

The company also announced its Board of Directors has approved a 20-for-one stock split.

Alphabet is planning to split the Class A, Class B and Class C shares of the stock. The split still requires shareholder approval. If approved, stockholders of record at the close of business July 1, 2022, will receive on July 15, 2022, a dividend of 19 additional shares of the same class of stock for every share held by July 1.

Shares soared over 6% to a new record high following the company’s superior earnings announcements.

The stock has come a long way since I was among the first analysts to recommend Google in October 2005, within months of its 2004 public debut. At the time, shares were going for $42.50. Today, they’re hovering around $2,900 per share or 6,723% higher.

Google earns high marks for its Quantitative and Fundamental Grades, bringing the Total Grade to “B.”

Meta Platforms (FB) — Announced Feb. 2

Facebook had a lackluster fourth quarter, missing Wall Street’s expectations for the bottom line and coming in just over the consensus estimates for revenue.

Earnings of $3.67 per share were down 6% from a year ago and missed analysts’ forecasts for $3.82 per share by about 4%. The earnings miss was only the third in the company’s history.

Revenue of $33.7 billion was 20% higher than a year ago and beat Wall Street’s forecast for $33.4 billion by 0.7%.

Meta also reported its daily active users came in at 1.93 billion users, short of analysts’ expectations for 1.95 million.

Interestingly, the company said privacy changes Apple made to its iOS operating system will hit Meta’s sales this year by roughly $10 billion. “We believe the impact of iOS overall is a headwind on our business in 2022,” Meta CFO Dave Wehner said.

Meta executives also said inflation and supply chain backlogs are hitting advertisers’ budgets, and that customers are flocking to lower-revenue streams.

“On the impressions side, we expect continued headwinds from both increased competition for people’s time and a shift of engagement within our apps towards video surfaces like Reels, which monetize at lower rates than Feed and Stories,” Facebook said.

As a result, Meta released lackluster guidance for the first quarter, with expected revenue from $27 billion to $29 billion, which was lower than analysts’ expectations for $30.2 billion.

Meta stock sank on the earnings release, dropping as much as 27% Thursday.

As you can see, Meta earns an “F” for earnings momentum, no surprise there, as well as “C” grades for its Operating Margin, Earnings Growth, Cash Flow and other factors; but its strong Quantitative Grade of “B” brings up its Total Grade to “B.”

I should add that the company hasn’t passed my fundamental models for over two-and-a-half years due largely to margin compression, or earnings aren’t growing as fast as sales.

Amazon (AMZN) — Announced Earnings Feb. 3

The online shopping and cloud services giant surprised Wall Street with a massive earnings beat in the fourth quarter and parsed its advertising business for the first time. The company brought in $31 billion last year from advertising and grew ad sales 32% YOY to $9.7 billion in the fourth quarter.

Amazon’s advertising business is now larger than Microsoft’s (NASDAQ:MSFT), though it only represented 7% of Amazon’s total revenue, and is now just behind market leaders Google and Facebook.

The company saw $137.4 billion in sales in the fourth quarter, or 9% higher than a year ago and just shy of analysts’ estimates for $137.6 billion. Amazon Web Services (AWS) cloud revenue came in at $17.8 billion, higher than estimates for $17.4 billion.

The company also said it will increase its price for its Prime service to $14.99 from $12.99.

Earnings of $27.75 per share crushed estimates for $3.44 per share by 706% and represented 95% YOY growth. A big factor in the company’s earnings beat stemmed from its huge profit of nearly $12 billion on its purchase of $1.3 billion in stock of the electric car maker Rivian Automotive, Inc. (NASDAQ:RIVN) before its IPO in November.

Looking ahead, Amazon said it expects sales from $112 billion to $117 billion in the first quarter, which is below the consensus estimate of $120 billion.

Amazon shares rallied as high as 14% following its earnings announcement and before the market opened Friday, which is a fantastic sign earnings are working.

But it’s lackluster “D” for its Quantitative and Fundamental Grades drops its Total Grade down to a “D,” making it a sell at this time.

The Bottom Line

Earnings season means it’s time for fundamentally superior stocks to bounce like fresh tennis balls when their financials come out and show who the true market leaders are. And that’s exactly what we saw happen with the FAANG earnings. While volatility in the markets will likely remain for the short term, the good news is there remains a “silver-lining” critical path for fundamentally superior stocks.

These are the companies that can raise prices and provide an oasis in an inflationary environment like the one we’re in. These are exactly the companies I recommend in Growth Investor. They have posted wave-after-wave of strong earnings results, and those positive reports have propelled many of my fundamentally superior stocks higher.

I should add that in the past three months, the analyst community has revised their consensus earnings estimate up 12.1% higher for my Growth Investor stocks. This is a very good sign, since positive earnings revisions typically precede future earnings surprises.

For more information on my Growth Investor stocks and what I expect from the stock market in the coming weeks, I encourage you to sign up for my Growth Investor service today. Once you do, you’ll have full access to my latest recommendations — including the most recent additions to my  Growth Investor  Buy Lists. One should be a big benefactor in the accelerating electric vehicle (EV) industry and two dividend growth stocks earn an AA-rating (an A-rating in Portfolio Grader, an A-rating in Dividend Grader and an A-rating for their Quantitative Grade).

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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Microsoft Corporation (MSFT) Meta Platforms, Inc. (FB), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG)

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