FAAG Q2 2020 – The one-way trade.

The stay at home trade has peaked with excellent results from most of the big technology names providing a timely boost so shortly after being “hauled over the coals” by the US Congress.

Apple FQ3 2020 – Well-heeled love

• Apple bucked the downward trend highlighted by its suppliers (Qualcomm and TSMC) with a 1.5% YoY growth in iPhone revenues showing that it is the lower end of the market and the less well off who are really suffering in this pandemic.
• FQ3 2020 revenues / EPS were $59.7bn / $2.58 well ahead of consensus at $42.4bn / $2.07.
• iPad and Mac also did well as the work and learn at home trend has peaked over the last three months.
• Apple has been somewhat held back by the pandemic due to store closures but this has been made up by the services business which now sports 550m paid subscriptions and grew 15% YoY.
• Apple shares are up 5% in after-hours trading but the valuation on this stock is now very far from anything that makes me comfortable.
• When the correction comes, Apple is as vulnerable if not more so than the rest of the market.

Facebook Q2 2020 – What boycott?.

• Facebook has once again demonstrated that until the users vote with their feet, the advertisers will say one thing but do quite another.
• Q2 2020 revenues / EPS were $18.7bn / $1.80 comfortably ahead of forecasts of $17.36bn / $1.40 as the impact of the boycott from large advertisers fell flat.
• More than 1,000 advertisers have said that they will pull their digital advertising, but this has done Facebook very little harm confirming Zuckerberg’s relaxed attitude towards this problem and his confidence that they will be back.
• Engagement with Facebook has continued to be strong through the pandemic and the platform has even added more users than expected coming in at 2.70bn MaUs compared to consensus of 2.63bn.
• Facebook is positioned at the sweet spot where digital advertising is most effective and so it has not suffered like Google from the general decline in digital advertising spend.
• Facebook’s business has been running at an elevated level, but this is now likely to come back a bit as people emerge from lockdown and have other things to do with their time.
• Facebook continues to confound its critics but that does not mean I particularly want to buy the shares.

Amazon Q2 2020 – More of same.

• Amazon fared much better than it had guided for as locked down shoppers continued to shift their spending towards Amazon which allowed commerce to make up for a slip in cloud revenues for once.
• Q2 2020 revenues / operating income were $88.9bn / $5.2bn well ahead of estimates at $81.29bn / $0.2bn.
• This was a particularly impressive performance given the extra $4bn of COVID-19 related costs and the revenue and profit miss at AWS which has been the provider of almost all the firm’s profits for some time.
• AWS saw 29% growth in revenues to $10.8bn but this is much slower growth than what Microsoft managed to record and below consensus which was at $11.0bn.
• However, as IBM has seen, spending on the cloud is not a one-way street with ensuring that employees can work from home and mission-critical investments being prioritised over the general cloud migration theme.
• Because AWS is so big, it has wide exposure to the cloud unlike Microsoft which is still smaller but more focused in the areas where the spending has been at its highest.
• Amazon remains a pure momentum investment with little emphasis being placed on its fundamental capacity to generate value for its owners.
• Investors continue to do very well from this but as a value-oriented investor, I have never really been able to get behind this stock.

Google (Alphabet) Q2 2020 – holding pattern

• Alphabet reported the first revenue decline in its history, but this was ahead of consensus and so the results were consequently well received.
• Q2 2020 revenues-exTAC / EPS were $38.3bn / $10.13 was ahead of estimates at $37.3bn / $8.19 but still fell 2% YoY and 30% YoY respectively.
• Advertising revenues fell by 8% YoY but growth in its nascent cloud business of 43% YoY and a 26% growth in its other business such as Google Play helped to keep the decline to a minimum.
• Google will continue to invest in the cloud but it is looking more carefully at other areas particularly those that include big and shiny but brutally expensive office buildings which are likely to remain empty for some time.
• I think that for the rest of this year Alphabet is going to go into a holding pattern.
• It has seen some recovery in advertising spending but while the pandemic continues to ravage the economy, I cant see revenue returning to its normal trend.
• Alphabet is not the most expensive of the FAANG names, but it is also not exactly cheap either at 30x 2020 PER leaving me to remain uninterested.

Take-Home Message

• Q2 2020 looks like it will be the peak of the stay-at-home trade in terms of its impact on the fundamentals of these companies.
• Hence, I think Q3 will begin a slow return towards fully opening the economies of the world.
• This means that internet traffic will normalise as people do other things and there may be a shift back to bricks and mortar retail from shoppers desperate to get out and do something.
• The work-from-home trend is likely to last longer given that no one is going back to work at 100% capacity and here Microsoft, Intel (internal problems aside), WDC, Seagate, AMD and so on look to be best positioned.
• These companies (excluding Microsoft) also have much more reasonable valuations and this is where I would be looking if I was to look at anything at all.
• It also means that interest in equity investors may be much less focused this one-way trade that has driven such excellent performance.
• This means I can see it flagging in the months to come.
• Overall, I remain very cautious on the equity asset class as it is being driven by money printing and deficit spending rather than economic fundamentals.
• I am also beginning to get nervous with regard to the value of the US dollar compared to gold and the other world currencies.
• The Swiss Franc and the Euro have seen nothing like the money printing or government borrowing that the US dollar has seen, and this looks like it is starting to have an impact.
• The smart money seems to be starting to get out of US dollars.
• The dollar index (DXY) is steadily heading downwards and I see no reason for that to be reversed as the same amount of value is now being shared across many more dollar bills.
• I have sold most of my US dollars into Swiss Francs but am also considering the Euro.