Meta, Alphabet, Netflix Sway Markets After Earnings

April 29, 2022

The once-unstoppable FANG stocks have been defanged this year, along with the rest of the stock market. But aside from one spectacular blowup, most of big tech is still growing, giving investors hope that earnings could prevent a bigger downturn in the markets.

This week, all but one of the FAANGM cohort reported earnings. The extended acronym—which includes Facebook (now Meta), Amazon, Apple, Netflix, Google (now Alphabet) and Microsoft—represents some of the most important companies in the U.S. stock market.

 

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Together, these firms make up 22% of the S&P 500. That’s why this week was arguably the most important week of the earnings season.

Though often lumped together as “tech stocks,” the FAANGM group extends across three different sectors based on the Global Industry Classification Standard. Apple and Microsoft are in the information technology sector; Amazon is in the consumer discretionary sector; and Alphabet, Meta and Netflix are in the communication services sector. 

Here we’ll break down the earnings reports for the latter three stocks, which make up a whopping 42% of the Communication Services Select Sector SPDR Fund (XLC). They also make up a hefty chunk of many other ETFs, which you can sort through by going to www.etf.com/stock/ticker (e.g., www.etf.com/stock/NFLX).

Netflix Rerated  

The first to report was also the worst to report. Investors were stunned when Netflix said last week that it had lost subscribers for the first time in more than a decade during Q1’2022. It was a crushing blow for a stock that had already lost half its value, much of which was attributed to the previous earnings report—in which the company forecast growth slowing rapidly, but still rising.

For its subscriber base to outright contract was too much for many investors to bear, leading to a 35% single-day drop in the stock. The stock kept tumbling in the following days, at one point falling as much as 73% off its all-time highs from last year. 

Netflix has now arguably been rerated from being priced like a growth stock to a more mature media company. The firm reinforced that idea when it said that it was no longer focused on subscriber growth, but on average revenue per membership.

It hopes to turn things around by monetizing the millions of households who use Netflix with shared passwords but don’t pay for the service, and by doubling down on its gaming and international content initiatives to reinvigorate enthusiasm for its offerings.

Meta Comeback  

When Netflix shares crumbled after reporting its fourth quarter 2021 earnings earlier this year, it was joined by another media company—Meta. This time around, Meta headed the other way, jumping 18% after its first-quarter report. 

Investors were pleased that the company was able to grow its user base after it declined for the first time in its history the previous quarter.

Meta missed analysts’ revenue estimates in Q1 and guided to lower-than-expected revenues for Q2, but a lot of that was attributed to the geopolitical situation in Europe and a spike in the U.S. dollar, which relieved investors.

Investors were also happy that Meta was planning to spend less money this year than it had previously projected, though the firm was still very much committed to investing billions of dollars to realize its futuristic vision of the metaverse.

Despite the rebound in shares, Meta remains in the doghouse, with the stock about 46% below its highs—the worst performance of the FAANGM cohort, other than Netflix.

Weakness in the digital ad market—exacerbated by Apple iPhone privacy changes that make it harder to target and attribute ads—as well as competition from TikTok may continue to weigh on the shares. Meta guided to essentially zero revenue growth for the second quarter; if and when growth reaccelerates, the stock could begin to perform better. 

Google Relatively Insulated  

Unlike Meta, which said it would take a $10 billion revenue hit from changes to Apple’s privacy policies, Alphabet said no such thing. It was stark contrast for the two biggest digital ad firms, which have tended to rise and fall together. 

Indeed, Alphabet’s Google had seemingly benefited from the Apple changes during Q4’21 as advertisers migrated from the “direct response” ads that Meta is known for to Google’s search-based ads, which rely less on tracking users across apps and more on the context of search queries. 

However, not all of Alphabet’s businesses have been immune from the overall weakness in the digital ad market. Its YouTube segment reported a sharp deceleration in growth to 14%. That’s well below the overall company’s growth rate of 23% in Q1. 

On the other hand, the company’s cloud computing segment, Google Cloud, continued to hum along with growth of 44%. Alphabet has been investing aggressively in its cloud services to catch up with industry leaders Microsoft Azure and Amazon Web Services. 

Alphabet shares slid 3.7% the day after reporting earnings, but the stock is only down a relatively modest 22% from its highs. 

 

Follow Sumit on Twitter @sumitroy2    

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