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Good Numbers, Ominous Response

Happy Halloween! Like so many other things in this pandemic year, quarterly earnings remain largely peripheral to the Fed's easy money policy, the details of Congressional stimulus and progress toward a COVID vaccine. Most companies are in limbo between the old pre-pandemic world and the "new normal" to come. Until we get to the other side, there's simply no point in extrapolating any of the numbers we see now into the future or comparing them to the past.

However, Big Tech has been something of an exception because computers don't get sick. These companies are relatively immune to the pandemic and in some cases even become more essential than ever when the rest of the economy shuts down. That's why we kept an eye on the biggest stocks in the sector during last week's earnings reports. Besides, when five companies account for about 25% of the entire market by capitalization, every bit of news they make is a big deal for Wall Street as a whole.

We were pleased to see that in all cases, the "pandemic immunity" story held up. These companies are not sick at all. Their operations generate as much cash as we expected . . . and we didn't lower the target much over the past year. Unfortunately, while COVID has had minimal drag on Big Tech, it hasn't been a big boon either. There weren't a lot of extremely bullish surprises in these reports, much less any kind of dramatic upside revision to forward guidance.

That's what investors starved for good news were desperate to see from these companies and that's what we didn't get. While we are not concerned, a brittle market can react badly when it doesn't get what it wants. We're reminded of October 2018 when Apple warned that iPhone sales were slowing, triggering a deep sell-off in the process. Be careful out there. It can get a little spooky in the next few months, but we're focused beyond the seasonal gloom. It will get better. And these companies will lead the way.

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Facebook (FB: $263, down 8% last week)  

On Friday, after Facebook reported 3Q20 earnings, the Street sent the stock down as low as $261 from Thursday’s $281 close. There certainly wasn’t anything in the results that was troubling. The company gets 99% of its revenue from advertising, and the slowing economy didn’t hurt this one iota. Facebook’s top line grew 22% year-over-year to $21.2 billion from $17.4 billion. This drove income 29% higher to $7.8 billion compared to $6.1 billion. The $2.17 EPS handily beat the $1.91 consensus estimate. The Street took exception with a couple of items.

First, its North American Daily Active Users (DAU) fell from the second quarter’s 198 million to 196 million. We should point out that this is the company’s first ever decline in that region, and management noted that they expected this given the surge in 2Q20 due to the pandemic. While Europe was flat, we would also note that it added more users in Asia and the Rest of the World, leading to total DAU growing by 2% from the prior quarter to over 1.8 billion. So, these other geographic areas are supporting growth. Plus, for its family of products, DAU grew from 2Q20’s 2.47 billion to 2.54 billion. Put another way, about one out of every three people in the world are using a Facebook product every day. With this dominance, it can set ad rates at any level they wish.

Management warned about the uncertain environment. We aren’t concerned with how COVID-19 will affect results since, as we’ve seen, it is handling this situation fine. The company is so successful, the biggest issue is the regulatory uncertainty, with the Federal Trade Commission apparently getting ready to file antitrust charges. We are watching this development. Our Target Price is $305. We have a $255 Sell Price to protect your downside in case the market weakens substantially or the regulatory risk intensifies. 

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Alphabet (GOOG: $1,621, down 1%)  

The stock had a strong Friday following the company’s robust 3Q20 performance, gaining 8% to $1,687 before falling back. We’ll still take a 3% advance for the day even if it wasn’t enough to put the stock in positive territory for the week. 3Q20 revenue grew 14% to $46.2 billion versus 3Q19’s $40.5 billion. The consensus estimate called for half that rate of increase. The company’s earnings were $16.40 a share, a 59% year-over-year increase, crushing the $11.29 Street estimate. Alphabet’s business was strong across the board, with its advertising revenue at its properties, including Search and YouTube, rising from $33.8 billion to $37.1 billion. This was nice to see after sluggish growth in 2Q20 due to some ad softness caused by the pandemic. The other businesses, like Cloud, also did well. With its strong businesses that go beyond just Search, you can’t keep this company down.

This is another company that is so successful the government has taken notice. The Justice Department filed an antitrust lawsuit. Right now, we don’t view this as a substantial risk since these things take time to play out. Even with this week’s pullback, the stock is past our $1,600 Target Price. We are as confident as ever in the company, and that means we are taking this opportunity to boost our Target Price to $1,865. The company, like the below all of FAAAM, is so strong that we don’t have a Sell Price.

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Amazon (AMZN: $3,036, down 5%)  

The stock was off by 6% at one point on Friday after the company announced 3Q20 results. It ended the day down 5%. We can only look at the fundamentals, as the company continues to execute its blocking and tackling better than just about any company on the planet. Sales increased 37% over last year to $96 billion from $70 billion. Income tripled to $6.3 billion. The stock has had a huge runup, and the Street just took a little breather. We urge you to stay the course. Management does not see a slowdown with their 4Q20 guidance calling for 33% sales growth to $117 billion. With the pandemic increasing online shopping and its ultra-low prices on just about everything under the sun, Amazon will continue to benefit. Our Target Price is $4,000. Our strong conviction has led us not to put in place a Sell Price.

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Apple (AAPL: $109, down 5%)  

This is another stock that received a rough reception after the company reported results on Thursday night. On Friday, Apple fell from $115 to $109. Make no mistake that we don’t like losing 6% in a day. But we are still enamored with the company’s prospects. Admittedly, the fiscal fourth-quarter results (ended June 30) were lukewarm, with only a 1% year-over-year sales increase to $64.7 billion and income of $12.7 billion compared to $13.7. Sales were $1 billion higher than analysts’ expectations.

Digging a little deeper, you’ll see why we remain excited about Apple. Its Mac, iPad, Wearables, and Services categories all had year-over-year sales increases. Mac’s sales rose from $7 billion to $9 billion; iPad’s sales went from $4.7 billion to $6.8 billion; Wearables sales were $7.9 billion versus $6.5 billion; Services saw sales rise to $14.5 billion compared to $12.5 billion; which leaves its biggest category, iPhone, as the laggard. Sales fell from $33.4 billion to $26.4 billion. Ordinarily, this would make us cautious. But the drop comes ahead of the company’s launch of the iPhone 12, which are 5G devices. These hit the market a couple of weeks ago, and we expect these phones, with much faster speed, to do well. Plus the Christmas quarter is upon us. We have a $130 Target Price and don’t have a Sell Price.

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Microsoft (MSFT: $202, down 6%)  

The stock sold off on Wednesday after reporting fiscal 1Q21 (ended September 30). It went from $213 down to $202. There were a lot of positives in the earnings release. Revenue rose 12% versus a year ago to $37.2 billion, with profits of an astonishing $13.9 billion. That’s 37% after tax, almost unheard of in the world of business. This drove earnings per share 32% higher to $1.82. Productivity and Business Processes had an 11% revenue increase to $12.3 billion. This was led by Office Products, LinkedIn, and Dynamic. Intelligence Cloud’s revenue was $13.0 billion 20% higher. The primary drivers were Server Products and Cloud Services. More Personal Computing had a 6% revenue increase, with Windows and Xbox products leading the way.

The selloff was caused by what some viewed as disappointing guidance. Management expects 2Q21 revenue for the Productivity and Business Process and Intelligence Cloud businesses to have year-over-year increases of 9% and 15% respectively.

The market is selling off without asking questions, creating a more compelling valuation for this amazing company. Our Target Price is $235, and we don’t have a Sell Price.

Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998