Technology’s “Big 5” Report Next Week – 20% of SP 500 Market Cap

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Looking at the SP 500 EPS and revenue data in general, the trough in y/y decline in SP 500 EPS and revenue is expected to occur in Q2 ’20.

Lots of discussion late last week and early this week on whether too many investors are hiding in Technology within their portfolios.

Well, we won’t have long to wait since next week, we will hear from the “Big 5” although Amazon is considered Consumer Discretionary, and Facebook / Google (Alphabet) are now considered Communications Services.

Regardless of their sector label, most readers view these companies as “Tech” and they comprise an enormous amount of the SP 500 market cap.

The attached spreadsheet shows consensus EPS and revenue expectations for the March ’20 and June ’20 quarters for each large-cap giant.

Here are some general thoughts on the companies and the numbers. Individual earnings reports will be written on most of the above prior to their reporting:

Microsoft (MSFT):¬†Calendar Q2 ’20 is Microsoft’s fiscal 4th quarter since their fiscal year ends June 30, and Microsoft is one of just two companies of the above list that is expected to see stronger growth in Q2 ’20 than Q1 ’20 which is highly unusual given the lockdown. For Microsoft, as of today’s consensus, both EPS and revenue for the June quarter is expected to be sequentially higher than the March quarter. Microsoft warned on the PC business back in late February ’20, which is roughly 1/3rd’s of Microsoft’s revenue and operating income and the stock hasn’t missed a beat. Technically, MSFT remains above it’s 50-day and 200-day moving averages, with the stock up 6.5% YTD, versus the SPY’s return of -14%.

Amazon (AMZN):¬† The e-commerce and cloud giant is a clear beneficiary of sheltering-in-place much as Netflix was thought to be. For Amazon, I pay less attention to EPS than revenue, which is expected to grow +22% and +21% over the next two quarters per the consensus. Amazon was in an “investment period” over the last 12 – 18 and that’s usually when the stock treads water and in fact it did – and what’s even more unusual – after not doing much since September ’18 – AMZN has broken out to an all-time-high right in the teeth of the Covid-19 bear market. The stock is up 26% YTD versus the -14 drop in the SPY. No doubt Amazon Grocery and the emerging perishable delivery service gained some traffic during the Covid-19 worries. Some of the expected expense growth around Amazon “same-day” or 24 hour delivery is dissipating as well. Valuation and other detail will be discussed in the individual report.

Apple:(AAPL):¬† Apple will undoubtedly be hurt by the retail store closings and the pullback in consumer spending. It’s no surprise to see sequential declines in both revenue and EPS although the June and September quarters (Apple’s fiscal year end is September 30) are weaker than the December and March quarters. The company’s incredible strengths are it’s free-cash-flow generation and the ability to pivot to Wearables and Accessories and away from the iPhone business in late 2018, even when the iPhone was still 55% of revenue. Roughly 90% of client’s Apple positions were sold in mid-2018 with worries over the trade wars, and the future of the iPhone (Tech Hardware). Apple rose 82% in calendar 2019 versus the SP 500’s 32% in a year where revenue fell 2% and EPS was flat. (Like Bill Murray in CaddyShack, I have that going for me.)

Facebook (FB): Confidence was lost in Facebook in 2018 when the data disclosure issues arose although some is still owned in client accounts. As one very snarky commentator noted on Twitter said, “If you trusted Facebook with your data, now you can trust them with your money” when the issue of Libra and the Facebook currency arose. Frankly, Zuckerberg’s a genius, but what they did with allowing outside contractors to access Facebook’s customer data is pretty over the top. Libra got people’s attention including the Fed and the Treasury, and the Federal government put the kabosh on the currency as I understood it, but the fact the social network giant even got that far is testament to how far ahead Zuckerburg’s thought process remains. Still, i think there are three busted brands in the last two years: Boeing (BA), Wells Fargo (WFC) and – yes – Facebook. You can’t do that to your user base. Facebook beat the SP 500 handily in 2019, but from 1/1/2018 has underpeformed the SP 500. That’s 1/1/18 to 12/31/19 in terms of the performance period. Ad spending is supposed to be down this quarter and that will impact FB.

Alphabet (GOOGL): Like Facebook, Google is expected to be impacted by an expected decline in ad spending, although that ad spending pullback could probably have a greater effect on Google. Given the declines in 2nd quarter EPS for both Google and Facebook, the June quarter EPS is expected to fall 35% y/y and have negative revenue growth y/y as well.

Summary / conclusion: So a question for readers, “Should you buy relative strength in EPS and revenue, or relative weakness ?” Seeing Google’s Q2 ’20 EPS estimate already reflecting 35% y/y decline earnings, is that indicative of a stock that has all the bad news already discounted in the stock price, or should you stick with the stocks like Microsoft and Amazon that have shown little weakness in Q2 ’20 revisions unlike the rest of the SP 500 ?

Here is clients top 10 holdings as of March 30, 2020, with little change expected.

If Google and Apple get hammered after earnings, they will likely be added. However the fact that Apple remains such a big part of the SP 500 after 20 years of incredible out-performance, is worrisome.However it’s testament to Tim Cook’s leadership that he could transform and pivot Apple from a Tech Hardware giant to a Services business without missing a beat.

Take all opinions with a substantial dose of skepticism, including this blog and today’s post. This could all change quickly and the positions or the comments won’t necessarily be updated.

Thanks for reading.

(The consensus estimate data is as of 4/22/20. while the Morningstar return data and the Ychart return data is as of 4/21/20.)


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