Apple earnings will sharpen or blunt the FAANG

Most FAANG shares—with one big exception—have posted solid gains this month.

FAANGs regain their gleam

Despite two straight quarters when dominant U.S. technology firms missed estimates, most of their shares—with one glaring exception—have posted solid gains this month. This partly reflects a broad improvement of stock market sentiment as the year gets underway. But as companies making up the closely watched FAANG group (Facebook, Apple, Amazon Netflix and Alphabet-owned Google) and others prepare to report earnings in coming days, the key risk is that investors will conclude that the gains were unjustified, if results disappoint again. In turn, with the FANG’s colossal market value having helped set market direction for more than a decade, any new let downs will have far-reaching consequences for investors.

Apple taste test

Markets got a taste of this risk earlier in January when Apple issued a rare sales warning, with CEO Tim Cook pointing to “the slowing of the (Chinese) economy, and then the trade tension that has further pressured it”. The stock fell around 10% within minutes of the news, dragging U.S. futures lower in its wake and adding weight to global equity indices in the days that followed. With the trade dispute bringing both uncertainty and evidence that it may be exacerbating China’s economic deceleration, investor trepidation on Apple has hardly abated, which helps explain why the stock has underperformed the FAANG group in January, barely managing to rise at all.

Software bellwether

True, Apple’s key source of revenue – handsets – stands quite apart from how Facebook, Amazon, Netflix and Alphabet-owned Google generate their income. But Apple is not entirely dissimilar. Its ‘services’ division, including music, apps and more, has been its fastest growing arm for around four years. Additionally, with iPhones, iPads and Macs playing a key part in how the web giants make their own revenues from consumers, the FAANG won’t truly put the last few quarters behind them unless the whole group shows evidence of a return to its former pace, including Apple. Apple’s first-quarter earnings, due on Tuesday, will also be the first from the FAANG group since Netflix’s report sent fresh tremors through markets with record subscriber growth but also a lower-than-expected revenue forecast. As such, Apple’s earnings and forecasts could set a direction for sentiment that the rest of the FAANG finds difficult to shrug off.

Normalised price chart: Facebook, Amazon, Apple, Netflix, Google – year to date

• Apple Inc. first-quarter earnings, Tuesday 29th January, after U.S. market close
  • Apple shares slumped 10% after a rare sales warning earlier this month. Now, the focus is on whether it can meet, or even exceed a new revenue forecast of $84bn
• Microsoft Corp second-quarter earnings, 30th January, after U.S. market close
  • Sales at Azure, the software giant’s fast-growing cloud business, dipped in Q1. The stock will be hit if cloud growth slows further
• Facebook Inc. fourth-quarter earnings, 30th January, after U.S. market close
  • So long as advertising sales meet expectations for at least $16bn, the shares should hold on to their 11% advance this month. But investors also want a clear response to a stream of ongoing regulatory and PR mishaps
• Amazon Inc. fourth-quarter earnings, 31st January, after U.S. market close
  • Record Black Friday/Cyber Monday volumes in some regions bolster expectations of a strong quarter, with revenues near the higher end of Amazon’s $66.5bn to $72.5bn forecast
• Alphabet Inc. fourth-quarter earnings, 4th February, after U.S. market close
  • As usual, Google ad sales will be key. A 19% rise to $32.4bn is forecast though acceleration of online marketing and YouTube growth could bring upside surprises and strengthen margins
• Twitter Inc. fourth-quarter earnings, 7th February, before U.S. market open
  • Could Q3’s ad sales surge continue? The Q4 number is forecast higher at $755m, but with a lower rise of 17%. Solid reassurances on security will also be required after recent “unusual activity”