A crop of outstanding earnings reports this quarter for fundamentally superior companies helped send the S&P 500 to its 57th and 58th all-time highs on Tuesday and Thursday, respectively, and rose 1.2% for the week.
The Dow also reached a new all-time high on Tuesday and is up 0.3% for the week, while the NASDAQ reached a new record high on Thursday and climbed just under 2.5% this week.
But the markets woke up on the wrong side of the bed Friday morning after digesting disappointing earnings announcements from Apple Inc. (AAPL) and Amazon.com Inc. (AMZN).
The companies’ reports represented the last of the quarterly earnings announcements of the FAANG stocks, which also include Facebook Inc. (FB), Netflix Inc. (NFLX) and Google parent company, Alphabet Inc. (GOOG).
There’s lots of news to digest from these earnings reports, including Facebook’s branding reboot, so let’s use today’s Market360 to dig in.
Facebook (FB) – Announced October 25.
Facebook’s third-quarter revenue rose 35% year-over-year to $29.01 billion but was lower than Wall Street consensus estimates for revenue of $29.52 billion. Earnings climbed 19% year-over-year to $3.22 per share. Analysts were calling for earnings of $3.18 per share, so the company topped expectations by 1.3%.
Chief Financial Officer David Wehner noted that the company faces continued headwinds in the fourth quarter from privacy changes to Apple’s iOS 14 that gives users more control over privacy and has already put a dent in Facebook’s advertising revenue, which is a huge part of the company’s revenue.
Monthly active users rose 6% to 2.91 billion, which was just shy of analysts’ expectations for 2.92 billion. Non-advertising revenue almost tripled year-over-year to $734 million.
The company also noted plans to separate out its virtual reality business into a separate revenue segment next quarter it’s calling Facebook Reality Labs. Meanwhile, the company is investing big on the segment and expects it to reduce overall operating profit this year by about $10 billion.
CEO Mark Zuckerberg has said he’s interested in the company becoming a leader in the metaverse — a set of virtual reality spaces where you can create and explore with others who aren’t in the same physical space. To that end, the company has even decided to change its name to “Meta” to fall more in line with its goals for the metaverse.
“Today we are seen as a social media company, but in our DNA we are a company that builds technology to connect people, and the metaverse is the next frontier just like social networking was when we got started,” CEO Mark Zuckerberg said.
Facebook’s stock ticker will change to MVRS on December 1, which means the FAANG moniker may need an adjustment. MAANG anyone?
Facebook stock ticked up Thursday in advance of the new name change but is now down 4% since reporting earnings. The company also continues to face an onslaught of media reports about internal Facebook documents that reveal internal research identifying harmful effects from its products. The Wall Street Journal said on Wednesday that the Federal Trade Commission has begun looking into the company’s internal documents.
Amazon (AMZN) – Announced October 28
Amazon shares took a beating in extended hours trading Thursday after the company reported it missed on both top- and bottom-line estimates from Wall Street for its third quarter.
Revenue of $110.8 billion climbed 15% from last year, but missed analysts’ estimates for $111.6 billion. Earnings of $6.12 per share decreased from $12.37 per share a year ago and badly missed Wall Street’s expectations for $8.92 per share. That means Amazon missed analysts’ expectations by 46%.
Online store sales increased 3% from a year prior to $49.9 billion and physical store sales grew 13% from a year ago to $4.3 billion. Third-party seller revenue jumped 18% to $24.3 billion.
The company’s services segment, which brought in $55.9 billion overall, saw sales beat its retails sales segment for the first time in Amazon’s history. Amazon Web Services revenue came in at $16.1 billion, up 39% from a year ago and topping analysts’ forecast for $15.5 billion.
Shares started climbing modestly Monday ahead of the company’s earnings announcements but are up just under 6% on the year.
Alphabet (GOOGL) – Announced October 26
Google reported earnings of $27.99 per share, up 70.6% from a year ago and topping analysts’ estimates by $4.74 per share, or a 20% earnings surprise.
Revenue of $65.1 billion rose 41% from a year ago and beat Wall Street’s estimates for the quarter by $1.8 billion.
Google’s advertising revenue increased 43% year-over-year to $53.1 billion, while YouTube ad sales climbed 43% from a year ago to $7.2 billion. The company has been more insulated from the changes to Apple’s operating system than Facebook as it owns the Android operating system.
The company’s cloud division sales jumped 45% from a year ago to just under $5 billion as Alphabet continues to place significant investments in the segment.
Shares popped over 6% after reporting earnings and are up over 66% so far this year.
Apple (AAPL) – Announced October 28
Apple announced its fourth-quarter earnings of $1.24 per share, which was up 70% from a year prior and in line with Wall Street’s consensus expectations.
Sales of $83.4 billion were up 29% from a year ago but missed analysts’ expectations by $1.62 billion. That means Apple had a revenue miss of 1.9%. The disappointing report marked the first time the company hasn’t beaten earnings estimates since April 2016 and the first time it hasn’t topped revenue estimates since May 2017.
CEO Tim Cook blamed supply chain constraints including semiconductor shortages and COVID-related manufacturing disruptions in Asia on lagging iPhones, iPads and Mac sales, which cost the company about $6 billion.
iPhone sales climbed 47% year-over-year, but still missed Wall Streets estimates, while iPads revenue increased 21% from a year ago, despite supply side constraints.
The company hasn’t provided forward guidance since the pandemic began, but Cook said he expects to see solid year-over-year revenue growth in the coming quarter even though the company expects supply constraints to worsen.
The company’s services business, which includes music and video subscriptions and sales from the App Store, shined for the quarter and was up 26% on the year and higher than Apple expected. Apple now has 745 million paid subscriptions, up 160 million year-over-year, and up five times in five years.
Shares have climbed about 7% from a low on October 13 and are 12% higher so far this year.
Netflix (NFLX) – Announced October 19
Streaming video leader Netflix announced earnings of $3.19 per share, up over 83% from a year ago and beating Wall Street’s consensus estimate for $2.56 per share by 24.6%.
Sales of $7.5 billion increased 16% from a year ago and just topped analysts’ estimates by $0.16 million.
The company added 4.4 million new paid subscribers, beating analysts’ calls for 3.84 million. Netflix said it now anticipates adding 8.5 million subscribers in the fourth quarter.
“We have so much content coming in Q4 like we’ve never had, so we’ll have to feel our way through and it rolls into a great next year also,” said co-CEO Reed Hastings.
Netflix also said it will begin using new metrics to report viewership, switching to hours viewed from the number of accounts that watched, which in part gives proper credit to re-watching content.
The company’s new hit show, “Squid Game,” has been its biggest ever, as 141-million-member households around the world watched the show in its first month after debuting.
Interestingly, Netflix said its viewership ballooned 14% earlier in the month when Facebook had a global outage.
Shares have increased over 6% since the company reported strong earnings and are up over 25%, year to date.
How to Play Like a Mastermind
The past week has been good to shares of the FAANGS overall, except Facebook. However, if you took the FAANGs as one portfolio right now, here’s how that would look in my Portfolio Grader.
As you can see, it’s a mixed bag.
The overall FAANG portfolio earns a Total Grade of “C,” with Google and Netflix earning a strong “B” for their Total Grade and a “B” for their Quantitative Grade, which represents institutional buy pressure under the stocks. Amazon and Facebook, on the other hand, earn a “D” for their Total Grade, meaning they’re an immediate sell, while Apple earns a “C” for its Total Grade, making it a solid Hold.
In fact, the stocks that earned poor grades in my Portfolio Grader sold off after reporting results.
So while a couple of the FAANGs are attractive buys right now, the remainder are not the fundamentally superior stocks my Project Mastermind system is tuned to find. Overall, I’d look for better opportunities in small-cap, high-growth stocks elsewhere.
In fact, my Project Mastermind system just spotted another fundamentally superior stock yesterday that’s been firing on all cylinders. In its latest earnings announcements was a stunner. The company reported triple-digit sales growth from the year prior and a triple-digit earnings surprise.
The company is slated to report its third-quarter announcements on Wednesday, and investors have been piling into the stock in anticipation.
Analysts are calling for triple-digit earnings growth from a year ago and double-digit sales growth. Over the past 90 days, analysts have revised their earnings estimates 82% higher. Positive analyst revisions typically precede future earnings surprises.
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:
Amazon.com Inc. (AMZN), Facebook Inc. (FB), Alphabet Inc. (GOOG)