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FAANG Earnings Season Winners

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2nd quarter earnings are slowly passing the peak of excitement with 75% of public US equities having already reported. As a whole, the market was almost indifferent to Q2 earnings with the S&P 500 trading flat in the second half of July. The recent 10% tariff announcement, which Trump is planning on executing on China September 1st, has been the cause of the markets recent tumble. FAANG is now entirely done reporting and below is their returns since mid-July.

In this article, I will discuss the FAANG 2nd quarter earnings season winner, Alphabet (GOOGL - Free Report) , and Apple (AAPL - Free Report) . I discuss the laggards in this category in my article, FAANG Earnings Season Laggards: Buying Opportunity?

Alphabet (GOOGL - Free Report)

Alphabet had a positive narrative in its 2nd quarter results. The firm was able to demonstrate a strong revenue beat driven by Other Google Revenue, which I hypothesize is growth in Google’s cloud segment. Management is giving the Google Cloud platform an annual topline run-rate of $8 billion.

YouTube is also growing fast with channels of 1 million+ subscribers being up 75% year-over-year. The company has also expanded its exposure of YouTube Music, and YouTube premium to now be offered in over 60 countries, which is a substantial increase from the 5 they had at the beginning of last year.

This quarter’s robust results abate 1st quarter concerns about a significant deceleration in ad-revenue. 

Regulatory headwinds remain a concern for the business and the antitrust probe that has been haunting these ad-driven firms is still in the back of investors’ minds.

GOOGL was up over 9% from the earnings report, but since then share prices have tumbled over 3% with Trumps new China tariff being the key catalyst.

I believe that Alphabet is lining up to be a buy with valuations on the lower side of its 5-year trend and growth deceleration concerns being tabled. GOOGL analysts have been increasing EPS estimates for the firm driving this stock into a Zacks Rank #2 (Buy).

Apple (AAPL - Free Report)

Apple just released earnings after the bell Wednesday, July 31st, and the market has responded positively with AAPL rallying over 4% today.  The firm had a top and bottom-line beat, but Apples biggest revenue driver declined for the third quarter in a row.

The smartphone market has been hitting a wall. Marginal improvements aren’t driving customers to update their already fully functional phones. Apple’s newest $1k+ iPhone doesn’t have judicious consumers racing to the store.

Other sources of revenue like Wearable’s, iPads and Services have been keeping the company’s revenues afloat with less and less reliance on the iPhone being seen as a positive by investors (though it still makes up more than 50% of the topline).

Apple is making a big bet on the next generation of smartphone devices with 5G being the focal point. Apple is attempting to develop and produce the next generation of iPhones in house with their recent vertical integration. The company recently acquired Dialog Semiconductor's battery-management chip assets and are in late-stage talks with Intel (INTC - Free Report) to acquire their smartphone modem chip business for 5G devices.

Apple and other smartphone manufacturers are praying that the next wave of 5G devices will spur demand and throw these companies back into growth.

Apple’s China exposure is something to be concerned about with additional tariffs on the table.

AAPL is trading on the higher end of its 5-year forward P/E trend. This is a consumer-discretionary stock that will underperform in an economic downturn with a beta of 1.25. Currently, Zacks is ranking AAPL as a #3 Hold.

Take Away

This recent China tariff announcement has investors flustered, attempting to value the impact and implications of this action. AAPL is down over 6% since the tariff announcement due to its substantial China exposure. As a long-term bet, AAPL may still be a solid investment if they can effectively capitalize on the 5G shift. Still, risk remains with this stock.

GOOGL is down about 2% since the tariff announcement. Alphabet just overtook Apple as the most cash-rich company in the world, meaning that they have the largest stockpile of cash & cash equivalence on their balance sheet. This gives them the most financial flexibility in the market. I have confidence that Google will remain the search engine leader while it spreads its wings into other fast-growing segments like cloud, smart home products, driverless cars, etc.

 

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