US tech giants released earnings this October in one of the most volatile stock market periods in many years. The last earnings season saw Amazon (AMZN), Apple (AAPL) and Google parent company Alphabet (GOOGL) outperform Facebook (FB) and Netflix (NFLX), the fellow members of the FAANG acronym.
This quarter was less predictable and threw up a number of surprises, not least being solid performer Microsoft (MSFT) overtake Amazon in market value. Netflix and Twitter (TWTR) also defied expectations of another tricky quarter for these challenger tech firms. Amazon and Apple were punished by the market for lowering forecasts for the currect quarter, which includes the key festive season.
Microsoft earnings usually do not garner as much media attention as the FAANG stocks but the company regularly beats estimates.
At the beginning of the third quarter, Apple and then Amazon became the first companies to make the $1 trillion valuation. At the time, Microsoft was in third position with a market cap of $831 billion – now Microsoft’s market cap is close to $800 billion and Amazon is $748 billion.
In what it is Microsoft’s first quarter of its new financial year, the company reported a 20% increase in revenue and a 34% profit increase, driven by continuing growth in its cloud computing division. Morningstar analyst William Fitzsimmons described this as a “phenomenal quarter” for Microsoft, maintaining a fair value estimate of $130 per share, around 30% higher than its current market price.
Amazon and Apple Shares Fall as Estimates Disappoint
Our analysts remain positive on Amazon stock, believing it remains undervalued at just over $1,500 per share and maintaining a fair value estimate of $2,200 per share. This gap has become more pronounced in October as the company’s share price has got caught up in the tech sell-off, dropping from $2,000 at the start of the month. This slide in value is despite a 10-fold increase in net profits in the quarter to a record high of nearly $3 billion.
While third-quarter earnings beat expectations, revenue growth and the outlook for this quarter troubled investors. The company forecast that fourth-quarter revenue would be in the range of $66.5 billion and $72.5 billion, well-below consensus estimates of $73.79 billion. With Black Friday, Thanksgiving and Christmas in the fourth quarter, analysts naturally focus more on this period than any other.
Apple stock suffered the same fate as Amazon after the iPhone maker lowered its estimates for the fourth quarter to the lower end of expectations. Shares in Apple fell 5% in after-hours trading to around $210 after it said that currency headwins, emerging market weakness and production hold-ups would hurt earnings. Again, like Amazon, the year on year revenue growth of 20% and 41% increase in EPS would be the envy of more "normal" companies.
Morningstar analysts maintained their fair value estimate for Apple at $200 per share after the results came out, just 5% below current prices. Analyst Abhinav Davuluri noted the success of the iPhone pricing strategy, with higher average selling prices (ASPs) despite flat unit sales. Looking ahead, Davuluri expects the iPhone XS/XS Max to dominate the high end of the market, although cheaper models are likely to lose traction in emerging markets where customers are more price conscious.
Facebook and Google Miss Forecasts
According to Morningstar analyst RJ Hottovy, Amazon is “likely to reshape retail, digital media, enterprise software and other categories for years to come”.
Facebook (FB) missed Wall Street forecasts for revenues and monthly user growth in the third quarter but its shares did not go into freefall as they did after second quarter earnings were released. Net profit of $5.1 billion or earnings of $1.76 per share beat expectations.
Google parent company Alphabet also disappointed investors, in terms of revenue forecasts at least, and its shares have fallen around 15% this month. Revenues were up over 20% on the year but the company said that the strong US dollar had impacted on the top line.
Maintaining Alphabet’s fair value estimate of $1,300 per share, higher than the current price of $1,050, Morningstar analyst Ali Mogharabi says:
“At these levels, we think Alphabet shares have become more attractive as we remain confident that the firm’s network effect and data economic moat sources will continue to drive growth in the size and overall usage of Google’s ecosystem.”
A rise of more than 50% in operating costs is still a concern for Facebook analysts as the social media giant ramped up spending on security and moderation, while limiting users’ exposure to advertising.
With a market capitalisation just above $100 billion, Netflix generates headlines in excess of its size – its product creates more excitement among consumers than, say Microsoft’s cloud offering. Subscriber numbers keep surging, and the latest addition of 7 million users in the third quarter was 2 million more than forecast.
Like most Nasdaq-listed stocks, Netflix shares had a rough October, dropping from $380 to $280 despite a results-generated daily spike of 15%. But this fall in the share price is also attracting interest among “bargain hunters”, with some Wall Street analysts making bullish predictions for the stock.
Nevertheless, Morningstar analysts are sticking to their view that the stock is significantly overvalued with a fair value estimate of $120, more than half its current value. “We project that the firm faces increased competition over the next five years, necessitating an ongoing cash burn and curtailing the speed of margin expansion,” says analyst Neil Macker.
