The current year has been an unprecedented one for multiple reasons, including the bear market witnessed in March and the subsequent recovery of equity markets, led by tech stocks.
Now we’ve entered the Q3 2020 earnings season and all eyes will be on Big Tech as they get ready to report their quarterly results later this month.
The S&P 500 Index is trading up 6.8% year-to-date and a significant portion of these gains have been driven by big tech companies. If these companies report better than expected results, you can expect the broader indexes to surge even higher. Alternatively, there can be another sell-off if big tech disappoints.
Let’s take a look at the expectations for FAANG stocks that include Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet’s Google (GOOG)(GOOGL). As we can see FAANG is an acronym for mega-cap growth companies that have crushed market returns in the last decade.
Facebook (FB) expected to post sales of $19.73 billion
Shares of social media giant Facebook have gained 28% in 2020 and 587% since its IPO in 2012. It ended the June quarter with 3.1 billion monthly active users which makes it one of the top digital ad platforms given Facebook’s massive reach.
Facebook is valued at a market cap of $745 billion and can be the next stock to join the trillion-dollar bandwagon given that it is yet to monetize WhatsApp and Messenger platforms.
Facebook is expected to report its Q3 results on October 29 and analysts expect sales to rise 11.7% year-over-year to $19.73 billion while earnings are forecast to decline by 11% to $1.89.
Facebook has beaten analyst earnings estimates in three of the last four quarters and the stock trading at a discount compared to analyst target estimates. Wall Street has an average 12-month price target estimate of $292 which indicates the Facebook stock has an upside potential of 12%.
Apple (AAPL) sales forecast at $64.16 billion in the September quarter
Shares of consumer technology giant Apple are up 59% in 2020 and close to 1,000% in the last 10 years. The world’s most recognizable consumer brand continues to churn out path-breaking products that drive its top-line growth.
While the iPhone continues to account for the majority of Apple sales, its Services business remains a key revenue driver along with wearable products such as the Apple Watch and AirPods.
In its fiscal third quarter ended in June, Apple sales rose 11% while earnings were up 18%. The tech behemoth experienced revenue growth in each of its business segments. The Services business which is Apple’s second-largest segment saw its sales grow by 15% year-over-year in Q3.
Apple is expected to report its Q3 results on October 29 and analysts expect sales to rise 0.2% year-over-year to $64.16 billion while earnings are forecast to decline by 6.6% to $0.71.
Apple has beaten analyst earnings estimates in each of the last four quarters and AAP stock trading at a marginal discount compared to analyst target estimates. Analysts have an average 12-month price target estimate of $121.4 which indicates Apple stock has an upside potential of 4.6%.
Amazon (AMZN) stock is trading at a discount of 16% to average target estimates
Another tech giant that has crushed market returns in 2020 is the world’s largest online retailer Amazon. Shares of Amazon have been on an absolute tear in 2020 and returned 74% year-to-date.
In the second quarter, Amazon’s sales were up a stellar 40% at $88.9 billion while its earnings of $10.3 surpassed Wall Street estimates of $1.46 by 600%. In Q3, Amazon forecast sales between $87 billion and $93 billion while analysts have pegged this figure at $92.48 billion.
Similar to Apple, AMZN also has multiple revenue drivers, including Amazon Web Services which is the leading public cloud platform in the world. The COVID-19 pandemic has acted as a tailwind for e-commerce companies as people had no option but to shop online and this accelerated change in consumer behavior will drive sales higher in the upcoming quarters.
Analysts tracking Amazon have an average 12-month price target estimate of $3,725 which indicates AMZN stock has an upside potential of 16%.
Netflix (NFLX) sales forecast to rise by 21.6% in Q3
Streaming platform Netflix will be reporting its Q3 results after the market closes today. Analysts expect the company to report revenue of $6.38 billion with earnings of $2.13 in the September quarter.
While revenue is forecast to grow 21.6%, earnings growth is estimated at 45%. Similar to Amazon, Netflix has also reaped the rewards of shutdowns across the globe that resulted in a massive spike in its subscriber base. However, Netflix’s management confirmed the subscriber growth witnessed in the first six months of 2020 is unsustainable and it will normalize in the upcoming quarters.
Netflix added 26 million subscribers in the first half of 2020, compared with just 12.3 million new subscriptions in the prior-year period. Netflix stock has gained close to 70% in 2020 and is trading at $530 which is higher than Wall Street’s average price target estimate of $527.
The final stock in the FAANG list is Alphabet which is also the largest digital ad platform in the world. After several years of double-digit growth, Alphabet’s sales in Q2 fell 2% year-over-year while its operating margin also fell from 24% to 17%.
Analysts expect Alphabet to report sales of $42.77 billion with adjusted earnings of $11.18 in Q3. This means the company’s revenue growth is forecast at 5.6% while earnings are expected to grow by 10.5% in Q3.
Alphabet has underperformed its FAANG peers as the stock is up just 15% in 2020. While its ad business rakes in the majority of the sales, Alphabet is also betting on growth in its cloud business to drive top-line at a time when the marketing budget of enterprises will remain tepid in the near-term. In Q2, Google Cloud sales were up 43% year-over-year at $3 billion.
Alphabet stock has a 12-month average target price of $1,759 which is 14% higher than its current trading price of $1,545.
The final takeaway
While the upcoming earnings are critical for companies, investors should also look at the management guidance provided during the earnings call. Though FAANG stocks are expected to remain volatile, each of these companies has strong fundamentals, robust balance sheets, and multiple growth drivers coupled with expanding addressable markets making them top bets for long-term growth investors.
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FB shares were trading at $265.48 per share on Tuesday morning, up $4.08 (+1.56%). Year-to-date, FB has gained 29.34%, versus a 8.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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