Through the past years, the FAANG companies (Facebook, Amazon, Apple, Netflix and Google) have shown enormous growth, a trend that was reinforced during 2020 and its unprecedented circumstances. In this article, we discuss their evolution, and which are the implications for the stock markets and the global economy.
Recovery and Growth Throughout the Pandemic
The existing correlation between the FAANG group and those goods and services that we use on a daily basis is quite straightforward: we turn to them when searching for information online, watching a series or buying the latest iPhone. These companies have become part of our life.
Chart 1 displays stock price behavior for the past five years, while the dotted line shows the overall decline in stock markets due to the increase of Covid-19 cases and the implementation of restrictive sanitary measures all over the world. The growth experienced by these stocks is evident, led by Amazon and Netflix with an increase of 390% and 364%, respectively. Despite the fall, it is clear that these companies have not only fully recovered, but also gained an additional impulse.
Chart 1. Own Preparation. Data: Bloomberg
Using Financial Statements as a Guide
Among the parameters to which investors should pay special attention to regarding public companies are the publication of their financial statements and how they behave in relation to expectations. Below, you will find crucial information about FAANG reports for the third quarter of 2020.
Earnings Per Share: USD 2.39
Forecast: USD 2.19
For the last quarter of 2020, the question is whether the company will succeed in its migration towards e-commerce and how it will manage its advertising revenue to maintain its momentum.
Earnings Per Share: USD 0.73
Forecast: USD 0.70
Apple’s dependence on Chinese demand for its products -mainly related to iPhone 12- has not been normalized yet, affecting investors’ expectations. Therefore, an improvement in the Chinese economy will possibly translate into a sales upsurge during 2021.
Earnings Per Share: USD 12.36
Forecast: USD 11.31
Jeff Bezos’ company is the FAANG member that made the largest leap, bolstered by a constant upturn in its sales. The main concern is connected with the increment in operating expenses due to the pandemic. Monitoring November results will be central since it is the month of Black Friday, and investors consider it to be an indicator of Amazon’s yearly revenue and sales.
Earnings Per Share: USD 2.28
Forecast: USD 2.36
Netflix subscribers did not fulfill the expectations of the market, making it the only FAANG company that caused a surprise due to its downward trend. With new restrictive measures set to fight new Covid-19 outbreaks in Europe and England, a follow-up on how new productions will be put on is of major significance.
Earnings Per Share: USD 14.04
Forecast: USD 13.50.
Advertising revenues have gone through a considerable rise, and the increase in the search for online videos brings up strong expectations on YouTube’s upturn. In order to adjust such expectations, the possibility of antitrust actions in the US and how they may affect Google’s expansion and revenues must be kept in mind.
Bubble or Necessity?
Amid the enthusiasm aroused by Big Tech companies, a doubt appeared within the stock market: Is the increase in stock prices real? Behind this trend, the question remains on whether these companies are overvalued, which, financially speaking, could mean that their share prices may not match their real value.
An interesting remark is that the fear of an abrupt drop in stock prices is what often leads investors to sell when faced with negative information, thus provoking such fall. Even though the latest publications of statements of some of these companies have led to mixed interpretations, it is also true that the pandemic has caused an increase in the demand for the goods and services that they offer. In addition, European governments are already considering taking new isolation measures to fight a second outbreak of Covid-19, which may take them back to a favorable scenario.
Finally, technology is, in this context, one of the best friends of millions of people who remain confined throughout the world, but more importantly, it is a strategic ally -and an essential one- for corporations, universities and schools. If the consequences brought by the pandemic persist, the ways of working and studying will continue to migrate towards the online environment, therefore giving another boost to these companies, and encouraging investors’ expectations on the confirmation of 2020 as the year of Big Tech.
Report made by Gandini Análisis for SupraBrokers only as content. It shall in no case be considered as an investment recommendation.