Amazon (AMZN) - Get Report, Facebook (FB) - Get Report and Apple (AAPL) - Get Report have all seen their stocks soar in the past month-and-a-half. Their earnings reports are expected to show coronavirus tailwinds to their largely at-home services, some of which have some sensitivity to the economic downturn.
Although there was a pullback in tech stocks last week, Apple, Facebook and Amazon are up 13%, 1% and 21% and since June 8, respectively. That date was just before the second surge of virus cases in the U.S. began, prompting investors to move into old favorites with strong balance sheets that can power through economic headwinds and a closed down economy.
Also, executives from all three companies plus Alphabet’s (GOOGL) - Get Report Google will testify in front of Congress on Wednesday regarding antitrust concerns. For years now, Congress has scrutinized these powerful platforms on anti-competitive practices. Hearings and rumors have caused some volatility in these stocks, but only in pockets of time as the market has now divined that harsh and business model-altering regulation won’t happen all at once or so soon.
These tech stocks now trade at fairly lofty valuations and what is revealed in their earnings reports may very well have an outsized impact on their prices. Netflix (NFLX) - Get Report, Snap (SNAP) - Get Report and Microsoft (MSFT) - Get Report have all drawn down significantly since reporting earnings. If consumer behavior in Netflix, found in management’s disappointing guidance and language, is any indicator for the rest of big tech, the virus tailwind may be closer to one-time than sustainable.
Here’s what to watch for on these earnings reports.
"Our revenue estimate is a tad below consensus and at the high-end of management’s guidance, primarily due to material strength in eCommerce demand,” wrote analyst at RBC Capital Markets Mark Mahaney in a note. Analysts polled by FactSet are looking for revenue growth of 28% for the second quarter to $81 billion. That’s a slight quarter-over-quarter growth acceleration, as Q1 showed 27% growth, as e-commerce and Amazon WebServices (cloud) catch the at-home tailwind.
Mahaney notes that "We believe that AWS revenue growth of 30% year-over-year (or modestly lower) in Q2 (vs. 33% year-over-year in Q1) is a distinct possibility given the Azure read-thru,” referring to Microsoft’s Azure revenue deceleration to 51% from 62%. FactSet consensus estimates call for AWS growth of over 30% to just above $11 billion.
Even on a revenue beat, investors may want to see profitability kick in. Amazon is known for delaying profitability in pursuit of meeting customer demand. Mahaney will be listening for Amazon’s operating expense spending plan for the year, as it rushes to meet the elevated e-commerce demand. Analysts are looking for a 1.4% operating margin, a decline of more than 3 percentage points year-over-year. But if the higher spend is said by management to have aided improved fulfillment capabilities, that could be another catalyst for the narrative that Amazon is the sure leader in one-day shipping, a long-term earnings driver.
Analysts are looking for adjusted earnings per share of $2.78, a decline year-over-year. Amazon had proved earlier in the year it will grow margins and profit dollars on its one-day delivery business ahead of schedule, but the pandemic was a significant cost headwind.
Positively, analysts at Canaccord Genuity expect strong forward-looking guidance that could feature something close to a 3.7% operating margin. That would signify both momentum in earnings and abating start-up costs for new demand.
The stock is trading at roughly 150 times next year’s earnings, a fairly lofty valuation -- and expanded one of late -- even against lofty expected growth rates for the next few years.
Analysts are looking for 3% revenue growth to $17.3 billion, as advertisers spend less while their sales are lesser in the face of the pandemic.
"We forecast advertising revenue growth of 4% year-over-year (vs. 17% in Q1), with the deceleration
largely due to economic uncertainty caused by COVID-19,” wrote Canacord Genuity analyst Michael Graham in a note. "The company will also likely provide an update on the recent launch of Facebook Shops and the expansion of Instagram Shopping, as Facebook looks to take advantage of strong eCommerce growth globally.” And it’s that long-term e-commerce growth driver that has kept investors piling into the stock, even though near-term estimates have been decimated by the virus, a dynamic that has expanded the valuation on a one-year forward basis considerably. The stock is trading at a more modest valuation off of “normalized” 2021 earnings projections.
Near-term, margins are expected to contract as the company continues long-term investments in the face of the ad revenue headwinds. Mahaney did say that, while Wall Street models 10% revenue growth for the entire second half of 2020, recent survey work suggests the ad spend recovery could be a V-shaped one. Guidance hinting at that could support the stock.
The expected Q2 EPS number: $1.64 on an adjusted basis, or a 26% decline year-over-year.
The stock is trading at roughly 27 times earnings, high, but modest compared to the last few weeks. Facebook has not participated in the tech run-up in the last few weeks.
Revenue growth is expected to decline slightly to $52.1 billion, driven by a steep decline in iPhone revenue at $22.2 billion, which may see decent results in China, which has recovered from the virus very quickly. But some analysts, like Morgan Stanley’s Katy Huberty, see services, which includes app store, credit card and streaming, as a stay-at-home beneficiary. Services revenue growth was humming at around just under 20% growth, but Huberty now expects that to come in at above 30%. Analysts polled by FactSet are looking for roughly $13 billion in services revenue, or about 25% to 30% growth, judging by FactSet numbers, which do not show services revenue estimates.
Just the results this quarter, regardless of estimates may be mixed, with hardware sales looking poor, but
here’s a word of advice from Cowen analyst Krish Sankar: "Owning AAPL stock here is not about the quarterly results/outlook into this call; it is about the long-term Services growth opportunity and upcoming 5G iPhone cycle. The Services segment remains a bright spot.” Sankar is looking for services revenue of $13 billion.
The stock has run-up on the assumption that the 5G story is intact, so language around those developments will be key, as well as the services narrative.
Those expectations have powered the stock to a valuation of 28 times next year’s earnings, slightly expended compared to the pre-virus valuation, but reflective of higher expectations for years past 2020. And the stock is trading at 25 times 2021 earnings, the expected rebound year, indicating that investors are highly confident in the mentioned growth areas.