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Market Commentary

Capital 19 Catch-Up – Trump, Facebook, Amazon, Apple and more.

Earnings Bonanza Sets Up an Exciting Week on Wall St

 

Trump moaned on Twitter last week that the media were focusing more on his Wall argument than the “Great earnings coming out of the Stock Market”. Well, this will all change this week as the nonsensical Wall imbroglio has a time-out while both sides regroup, and some of the biggest names on Wall St release their financial results to the punters.

Yes, the Cheeto-in-Chief finally blinked in the continuing Wall stand-off. Backing down after intense pressure from the public and from within his own Republican party, to sign legislation that opened up the government until February 15 without any of his precious wall funding.

But, “This is in no way a concession,” he says. Ahhhhh, yes it is, that’s exactly what it is. His pride will be dented but the fight isn’t over yet of course. He still wants his wall and tweeted “in 21 days if there is no deal done, it’s off to the races!”. You just can’t make this stuff up.

The good news for us is that the investing public now knows that a government shutdown won’t affect stock markets and that Trump will eventually blink when he doesn’t get his funding the next time around. He’ll still put us through all the drama though. He can’t help himself.

Now, onto topics we’d much rather be talking about.

 

The earnings calendar this week is chock full of juicy goodness, with 13 of the 30 Dow components reporting, as well as 122 of the S&P500. We’ll also see results from three of the biggest names on the market. Facebook (FB), Amazon (AMZN), and Apple (AAPL) will all report this week, and it will be a crucial one for each of them.

 

“Who wants to use a service when you know your private details are going to be sent to every Tom, Dick, and Vladimir with a few dollars to throw around?”

 

Facebook, of course, has been belted from pillar to post in the last few quarters. They had issues with nefarious side companies using their website to influence elections, countless cases of customers data privacy being invaded, and with this, most crucially, user growth has been slowing.

Consumer confidence in the Facebook product has dented usage and advertising sales over the last year. Who wants to use a service when you know your private details are going to be sent to every Tom, Dick, and Vladimir with a few dollars to throw around? They’ve spent a lot of money in the last quarter fixing leaks, and they’ve forgone a lot of money by being more selective in who gets to see their data. However, until they get the consumer back on side times will continue to be tough for the social media leader.

In saying this guidance and estimates are low, really low, and it won’t take much for them to surprise the market. A bad miss and they will see themselves back around the $120 mark, where they were at the end of December.

Like Facebook, Amazon’s share price also copped a beating in the last quarter of 2018, down over 25% off of its highs just before Christmas. It was the company’s worst quarterly performance in a decade. After briefly hitting a $1 trillion market cap in September it has now fallen to a measly $800 billion. I hope Jeff Bezos isn’t feeling the pinch too badly in his back pocket.

Unlike Facebook, however, Amazon’s fall was due to the general market drubbing that hit most technology stocks. And while long-time readers will know it hasn’t been my favourite stock over the years, it’s PE was up around 500 at one stage, there is (I hesitate to say) a lot of positive things happening in Amazon’s pipeline. I may even, heaven forbid, have to purchase some stock.

Their online retail sector continues to expand, which is impressive considering how dominant it is already. They have managed this thanks to their Prime offerings, where customers pay a premium to get cheaper and faster delivery, while also giving them access to a Netflix style streaming product.

Customers who use Prime are sticky. They spend more, and more often. It is the ultimate loyalty programme. And it’s expanding worldwide. We saw it here in Australia last year of course, but it also went to countries such as Canada, Mexico and China. It’s now in 17 countries and growing fast.

Another key growth area for Amazon has been their advertising business. They’ve been pretty quiet about this sector of the business so far but is getting harder to keep under wraps. There are no real numbers available on such things, hence the opportunity for secrecy, but the number crunchers will tell you that they made just under $5 billion in advertising revenue last year. That puts them third, behind Facebook and Alphabet aka Google. And Piper Jaffray’s Michael Olsen forecasts it could be as high as $10.6 billion by 2021.

Add to this the potential of the Amazon Go bricks and mortar retail business. The one where you grab a product off of the shelves and just walk out, while a machine scans what you have taken out and charges you for it. And you’re talking massive growth in the next few years.

Sure it will cost them a fortune. They have announced they plan to build at least 3000 of these stores and they don’t come cheap. But the margin they’ll make, thanks to the stores being unmanned, means the profits will be rolling in after the initial investment. RBC Capital predicts it could be making $1-$2 billion per store in just a few years time. That’s another $4-$5 billion you can add to the coffers.

Amazon has a good record of beating earnings, and after the recent beating they’ve taken on Wall St it may well be worth punting a dollar or two on their recovery.

Now, onto Apple. I love Apple earnings time. The media continue to squabble over the pros and cons, and whether it’s a buy or sell, or how long there is to go until the company goes under. In the meantime, Apple keeps on pulling in the billions, adding some to the cash stockpile, but increasingly, spending on other income streams that will take it into the future.

“Profit is what makes companies rich, and in this context, Apple is still the king.”

The squabbling is all rubbish of course. All you need to do is look at the fundamentals. It may have lost the biggest company in the world title, for the moment. But market cap isn’t what makes investors money – in fact, it can merely suggest a stock is overpriced. Profit is what makes companies rich, and in this context, Apple is still the king.

When Apple downgraded their revenue guidance back at the start of the month they set themselves a low hurdle to beat on Tuesday. The bad news is already in the stock price, it’s down 30% over the last few months and they are ripe for an earnings beat here. I’m very confident they’ll surprise to the upside. If they somehow miss the mark and the price falls further I’ll be filling my pockets with stock, but I just can’t see it happening.

There’s plenty of massive names on the earnings front this week. If you have a portfolio of US stocks (which of course you should!), it is likely one of your stocks is reporting. Check out the full list below and good luck!

It’s also a big week for economic data, with a speech from Federal Reserve Chairman Jerome Powell, and culminating in the non-farm payrolls on Friday.

Have a great week all.

Cheers, Paul.

Earnings this week

  • Tuesday: Apple (AAPL), 3M Co (MMM), Amgen (AMGN), Biogen (BIIB), Xerox (XRX), Lockheed Martin (LMT), Harley-Davidson (HOG), eBay (EBAY), Pfizer (PFE)
  • Wednesday: Alibaba (BABA), AT&T (T), Boeing (BA), Mcdonald’s Corp (MCD), Microsoft (MSFT), Facebook (FB)
  • Thursday: Amazon (AMZN), General Electric (GE), Yum China Holdings (YUMC), Raytheon (RTN)
  • Friday: Exxon Mobil (XOM), Merck & Co (MRK), Honeywell (HON)
  • Monday 4th Feb : Alphabet (GOOGL), Sysco Corp (SYY), Gilead Sciences (GILD), Navios Maritime (NMM)

 

Economic Data:

  • Tuesday: Case-Shiller house prices, Consumer confidence
  • Wednesday: ADP employment, Q4 GDP, Pending home sales, FOMC announcement and Jerome Powell press conference
  • Thursday: Weekly jobless claims, Personal income, Consumer spending, Core inflation, Chicago PMI
  • Friday: Nonfarm payrolls, Unemployment rate, Average hourly earnings, Manufacturing PMI, ISM manufacturing index, Construction spending, Motor vehicle sales

 

 

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