Market Overview

31 July 2020

FAANGs Run High Above the Market

The corporate reports from the four IT giants from the so-called FAANG group released on Thursday after the close of regular trading, surprised even the hard-boiled but inveterate optimists. Amazon shares showed $3211 in extended post-market trading and even $3217 later during today's pre-market period, which means +5.41% if compared with the official $3051.88 closing price yesterday. Apple Co shares soared to $402 in the post-market period, and climbed even higher to $407.73 in the pre-market trading hours, almost six % higher than after the regular finish line near $385 just a day before. Facebook tried $251 in extended trading and slipped to $248 during the pre-market hours today, but both prices were above the previous historical records for the most popular social network in the world. 

Alphabet (Google) is the only one from the quartet that remains at almost the same price levels until now, as Google reported its first-ever decline in quarterly revenue but the results still beat Wall Street's crowd expectations. Despite that, Google posted an increase in revenue from YouTube ads and its cloud-computing business. Shares of the world’s biggest search giant is still considered undervalued by many in the market, as investors hope that the company will catch up later, given that it is the only company from the FAANG big five group whose share prices have not yet updated the pre-crisis peak properly. 

As the four accounts represent one fifth of total market cap of the companies listed in the S&P500 index, the S&P500 index futures jumped higher in the last moment before midnight, and may also add some fuel to Wall Street’s opening on Friday. However, this afternoon, the S&P500 futures have slid slightly lower, as many in the market feel that “stay-at-home” winners have come off too far away from the rest of the market (see Pic.1)

 

Pic 1. Year-to-date stock price changes in 2020 vs the market capitalisation for the S&P500 list of companies

The pandemic has thrown the global economy into its steepest contraction since the Great Depression, when the U.S. gross domestic product (GDP) fell another 9.5% in the second quarter of the year, the Commerce Department said on Thursday. On an annualised basis, which is the standard but absurd way of reporting quarterly economic data for now, GDP dropped by 32.9% (but this figure is meaningless since it is formally obtained if the officials extrapolate the pace of economic decline in the previous quarter to all the future data until the end of the year). But, perhaps, the deep-pocketed IT-giants will come from the pandemic even stronger since the demand for on-line services is rising. 

As for Amazon.com, the world’s largest online retailer, posted the highest $10.3 per share profit in all its 26-year history, compared with the average expectations at only $1.38 per share level, according to Reuters polls, as online sales and business supporting third-party merchants surged significantly. While many smaller rivals had to suffer, Amazon hired 175,000 people during the quarantine and met the growing demand for its services, so the company's revenue jumped 40% from a year earlier to $88.9 billion. The juicy story is that Amazon had its own forecast that it might lose money towards the end of  Q2 2020 because it expected to spend some $4 billion on protective equipment for staff and other COVID-19 related additional expenses. Amazon did just that, but still earned $5.2 billion, and double its net income from Q2 2019. 

Online store sales jumped 48% to $45.9 billion as merchants paid Amazon to sponsor their products and to reach customers, resulting in a 52% jump in seller services revenue and a 41% growth in other revenue, such as from advertisement. The revenue from Amazon Web Services (AWS), which sells data storage and computing power in the cloud, surged nearly 29% to $10.81 billion. Jeff Bezos, the founder of the company and now the richest person in the world, said in a statement: “This was another highly unusual quarter.” Amazon report includes the forecast of net sales of as much as $87 billion to $93 billion for the third quarter. It is likely that such forecasts may allow Amazon equities to enjoy an increasing demand even today, though the price already jumped to $3,200 per share and probably may go higher, since even before the release of yesterday's report, many investors kept in mind the targets of $3,500 or more per Amazon share for this year. 

It may be somewhat more difficult or slow to move further into the sky for Apple or Facebook shares since both of them have already leapfrogged their previous all-time historical records in the pre-market period. Apple beat the first quarter figures, showing revenue of $59.69 billion against $58.31 billion, although this is far from the absolute quarterly record of $91.82 billion in Q4 2019. However, in the second half of the year Apple's results are always much higher since new iPhone and iPad models are usually released at the end of September. In 2020, Apple management officially announced that the new iPhone 12 would be unveiled a few weeks later in October, but that didn't stop stock prices from jumping quickly above $400, as the Q2 results included iPhone sales, which were some $4 billion above of the average expectations of $22.37 billion, according to IBES data from Refinitiv. With 60% of sales coming from international markets, the California-based company posted iPhone revenues of $26.42 billion. 

Facebook nearly doubled its profit, even when warning of consequences from advertisers' boycotts in July. The New York Times admitted today that "Mark Zuckerberg, the chief executive of Facebook, displayed the social network’s enormous financial clout on Thursday, even as the company has dealt with regulatory scrutiny and advertiser boycotts". The company said its number of monthly active users rose 12% from a year ago, while 2.47 billion people were using one or more of Facebook’s apps every day. Facebook’s revenue rose 11% from a year earlier to $18.7 billion, while profit jumped as high as 98% to $5.2 billion. All the results were well above analysts’ estimates of $17.3 billion in revenue with a profit of $3.9 billion, according to data provided by FactSet. 

Prior to Thursday’s after-hours surge, Amazon had gained 64% year to date, while Apple was up 29% and Facebook and Alphabet (Google) had each risen about 14%. “Even the bears will say that these are fantastic companies and they are not going to stop being fantastic. The unifying factor is they have the ability to both grow and control their cost structures through the pandemic. That is always a good place to start from when you have a downturn,” said Nicholas Colas, co-founder of DataTrek Research.

 

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