The recent run-up in U.S. stocks has been led by companies with secular growth trends that seem unaffected by the recession and oil stocks. With a couple of big tech earnings reports upcoming and Netflix NFLX shares showing some vulnerability, short-term investors could soon take profits.
If stocks soon retreat meaningfully, they will have had a bear market rally. As of April 22, the S&P 500 has rallied 24% from its March 23 multi-year low.
Oil stocks have led the rally, with stocks like Exxon Mobil (XOM) - Get Exxon Mobil Corporation Report up 34% from the low. Oil prices have done bizarre things in the downward direction, but many on Wall street see crude oil going back towards $40 a barrel (below $20 in April) by the second half of the year. Stock investors have reflected that belief, as the market prices in an economic rebound post-coronavirus.
But Amazon (AMZN) - Get Amazon.com, Inc. Report, Microsoft (MSFT) - Get Microsoft Corporation Report and Netflix (NFLX) - Get Netflix, Inc. Report have all rallied as well. They’re up 34%, 28% and 31% since March 23 respectively. What these stocks have in common: secular growth trends that can largely cut through this recession and strong balance sheets (Netflix is more levered).
Let’s go stock by stock.
Investors are betting that Amazon is seeing a surge of demand, as consumers purchase more items online during the lockdown. Meanwhile, Amazon has managed to reaccelerate expected growth in global e-commerce over the next several years, as it has begun to perfect its same-day delivery capabilities. The work-from-home environment creates additional need for cloud storage, benefiting Amazon Web Services.
But Amazon is now trading at 85 times 2020 earnings, slightly higher than at the beginning of the year, although Amazon is expected to sustain roughly a 30% earnings growth for more than four years out, according to FactSet consensus estimates.
Analysts polled by FactSet are looking for earnings per share in the first quarter of $6.34. Amazon reports earnings next Thursday.
Microsoft investors had to weigh two competing trends, at the stock’s March 23 low of $135 – down from $160 in January.
The company said its software revenue related to PC’s would be negatively impacted as PC makers halted activity due to the coronavirus. That’s part of the More Personal Computing segment represents 30% of annual revenue in the near-term. Against that, the fast-growing business cloud segments are likely seeing a tailwind, at least according to Wedbush Securities analyst Dan Ives. Businesses may accelerate their shift to Microsoft’s services as the work-from-home change is well underway, aided by lockdowns.
But More Personal Computing isn’t growing, while the business cloud services are expected to grow at high rates for the foreseeable future. The Azure product, for instance, is expected to see more than 50% year-over-year revenue growth in the upcoming quarter.
Microsoft now trades at 31 times next year’s earnings, which is high for the last year or two, but not exorbitant.
Microsoft reports earnings April 29.
Netflix earnings may have tipped off something important.
Netflix’s big trend is obviously streaming adoption globally. People staying at home singed up for Netflix in droves in the quarter, with Netflix reporting 15.7 million net added subscribers globally, compared to analysts’ estimates of 7.2 million. Guidance for the second quarter was for 7.5 million global net adds in subs, compared to analysts’ estimates of 4.1 million.
But revenue is only expected to beat estimates by a couple hundred million dollars, as currency headwinds take hold, but also average revenue per user in international markets is dropping. New subscribers are signing up for cheaper plans.
Meanwhile, Netflix shares rose 35% into earnings and fell 2% Wednesday after Tuesday’s earnings report.
Netflix seemed priced for perfection.
Amazon and Microsoft are in completely different industries, but they also seem priced for perfection into earnings.