How to trade FAANG stocks this earnings season
16th January 2019 11:53
by Rodney Hobson from interactive investor
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Leading industry commentator, accomplished author and new interactive investor columnist Rodney Hobson tells us what he'd do with these tech titans at results time.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stockmarket. He is qualified as a representative under the Financial Services Act.
Remember Blackberries? Not so long ago, wannabes loved to ping over texts and emails with “Sent from my Blackberry” on the bottom. It was a sign of climbing the social and business ladder, that you were tech savvy and had the latest gizmo. Now blackberries have gone back to being a pie filling.
It's a warning how fast technology moves and how quickly today's must-have items can disappear, taking whole companies that fail to constantly innovate down the pan. Millennials can be forgiven if they have never heard of Nokia, once the mightiest mobile phone manufacturer.
So if you think, quite reasonably, that the FAANGs are the future, it is worth considering what sort of year 2019 is likely to bring for Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ: GOOGL) (Renamed Alphabet). All finished 2018 with shares well below the year’s high so there could be scope for recovery over the next 12 months.
It's easy for investors, like companies, to become complacent, which is why the profit warning from Apple was such a shock. After a "challenging" quarter, California-based Apple reduced estimates of its first-quarter revenue from $89-93 billion to $84 billion, with gross margins at the lower end of its guide range.
Apple was quick to blame its downturn on the slowdown in the Chinese economy, and there is no doubt that the US-China trade war has had a serious adverse impact. Much more worrying, though, is criticism of the latest iPhone6, which is prone to bending – a fault that Apple apparently knew about before they launched it as it affected earlier models to a lesser extent.
Source: interactive investor Past performance is not a guide to future performance
Unfortunately, Apple thinks the fault is acceptable, showing a perilous contempt for customers who feel otherwise, and has tried to blame resultant problems with the touchscreen on buyers dropping the phone onto a hard surface. This is a dangerous attitude, as there are other phone manufacturers around. Customers can switch allegiance easily.
Microsoft showed similar disregard for customers when it launched the ill-functioning Vista version of Windows some 20 years ago but has shown signs of learning its lesson. It did at least rush out the much better Windows 7 and has since launched further improvements. The big difference, though, is that Microsoft has a virtual monopoly and it would be massively expensive, with little guarantee of success, for a rival to muscle in on its territory.
Google is one rival that has taken on Microsoft and won. Its Google Chrome has, with a little help from the regulators, held its own against Microsoft's Outlook and Google is the default choice as a search engine. It is hard to see that changing.
Source: interactive investor Past performance is not a guide to future performance
Netflix does have plenty of rivals. TV is a highly competitive market where it is easy to fall from a pinnacle, as ITV has done in the UK.
However, it is producing highly acclaimed content such as Game of Thrones and The Crown so the outlook is pretty good at this stage. Investors should be wary, though, as fortunes can change rapidly.
Source: interactive investor Past performance is not a guide to future performance
Facebook is also in a highly competitive market, one where followers switch allegiance almost on a whim. This is an area where young people predominate so it is vital to keep attracting new adherents.
It is hard to see what Facebook offers that cannot be provided elsewhere in social media, so it is always going to be vulnerable.
Source: interactive investor Past performance is not a guide to future performance
Amazon, like Microsoft, has spent several decades building up an impregnable position in its own field.
Similarly, setting up an alternative delivery service would be excessively expensive with little prospect of success. Even if it is forced to pay a fair share of tax in various parts of the world it will continue to be highly profitable.
Source: interactive investor Past performance is not a guide to future performance
Investors seeking income should note that only Apple currently pays a dividend and the yield is under 2%.
Hobson's choice: Buy Alphabet (Google) with a price/earnings (PE) ratio of 24 and possibly Netflix and Amazon despite PEs in three figures. Avoid Facebook and Apple.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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