Shares of Meta Platforms, Facebook’s parent company, are off by more than 40% so far this year.
Nick Otto/Bloomberg
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There has been no refuge for technology investors this year. And it could be some time before they find shelter.
The market’s most beloved technology names—the basket of large-cap shares known as the FAANGs—are all down by double-digit percentages this year. Stock in
Meta Platforms
(ticker:
FB
), Facebook’s parent company, is off by more than 40%, while
AMZN
) has lost 35%, and
Apple
(
AAPL
) has slid 14%.
Netflix
(
NFLX
) and
Alphabet
(
GOOGL
), the parent company of Google, are down by 71% and 22%, respectively.
They may not reach bottom soon. While some have downplayed the volatility by suggesting the drops were overreactions driven by market sentiment, there have been fundamental reasons for the declines.
In aggregate, the two earnings reports each of the FAANG names have issued this year have revealed mounting weaknesses for the companies. While Amazon and Netflix were among the biggest winners during the pandemic, both companies have suffered from dramatic slowdowns in their core businesses as consumers have shifted spending from digital services to real-world experiences. The internet advertising businesses inside Meta and Alphabet have also have been hit by fading e-commerce revenues. And Apple hasn’t been immune from rising costs and supply-chain issues in China.
But let’s take a step back. Stock prices are mainly derived from the market’s view of the outlook for profits. They have two components: earnings per share and the valuation multiple, also known as the price-to-earnings ratio. The price depends on how much investors are willing to pay for the profits a company is expected to bring in.
That’s why it is important to look at the trajectory of consensus earnings estimates. And for FAANG stocks, the earnings forecasts are coming down.
According to FactSet, the consensus calls for December quarter earnings for all the FAANG names have dropped since the end of January. The shifts are as follows.
Meta has gone from $4.41 to $3.75;Amazon: $13.23 to $11.39;Apple: $2.22 to $2.17;Netflix: $1.91 to $1.61; andAlphabet: $32.15 to $31.68
What happens now? The next move for the FAANG stocks will be determined by whether earnings estimates go up or continue to go down. Unfortunately for FAANG shareholders, it looks like it will be the latter.
Some of the biggest names in technology have been warning companies there may be more difficult times ahead. Last month, Amazon founder Jeff Bezos said when the “bull run” in technology ends, “the lessons can be painful.” On Sunday,
Microsoft
co-founder Bill Gates told CNN the bears have a “pretty strong argument” that rising interest rates could lead to an economic slowdown.
Another leg down could be also be driven by corporate spending reductions. In an email sent to staff over the weekend,
Uber Technologies
(UBER) management said the company planned to cut marketing and other expenditures. As enterprise-spending reductions filter gradually throughout the industry, it may lead to a negative feedback loop where a cycle of cuts drives more reductions.
Ultimately, FAANG stocks are unlikely to go higher until the market gets a clearer sense of when earnings estimates might rebound. Given current trends, it may take a long time.
Write to Tae Kim at [email protected]
Source: https://www.barrons.com/articles/faang-apple-amazon-alphabet-stocks-losses-earnings-outlook-51652130116?siteid=yhoof2&yptr=yahoo