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Predicting Q3 Earnings through FAANG with Beth Kindig

FEATURING I/O FUND’S, TECHNOLOGY INDUSTRY ANALYST, BETH KINDIG @Beth_Kindig

 

FAANG – An analysis of FAANG heading into Q3 earnings

FAANG is a well known acronym that includes some of the most successful tech companies: Facebook, Amazon, Apple, Netflix and Google. These highly liquid stocks generally lead the market, as they have certainly done this year. I/O Fund Portfolio Manager, Knox Ridley, outlined during his recent market commentary that 9 out of the top 10 names in the S&P 500 are Big Tech. Collectively, they account for 25.18% of the entire index weighting with Microsoft and Apple alone accounting for 11.8% of the S&P 500.

Given FAANG’s large weight in the market index, FAANG’s returns can dictate how the market performs, which places an emphasis on the upcoming earnings results.

 

YTD Returns: Google Leads by a Wide Margin

The first two charts below are a snapshot of YTD returns for FAANG. The first chart highlights the close similarity in returns for FAANG and the S&P 500, as FAANG holds a nearly 20% weight in the S&P 500 index. Respectively, both FAANG and S&P 500 are up 22% YTD.

FAANG Compared to S&P 500

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By breaking out the FAANG stocks, we can see that all five stocks in the group are positive YTD, but the divergence in returns is large: Google (aka Alphabet) is up 63% YTD while Amazon is nearly flat, Facebook and Apple have retraced a bit since the beginning of September while Netflix has outperformed since August.

FAANG Constituent’s YTD Returns

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As stated, when FAANG performs well, the market also performs well. The inverse is also true, when FAANG struggles, so does the general market. A great example of this trend was during the back half of 2018 when the market sold off after FAANG had peaked around Q3, as seen below.

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Since FAANG has an outsized impact on the general market, FAANG Q3 Earnings should set the stage for the entire market. Below, I discuss what the market expects from FAANG heading into Q3 Earnings in more detail.

 

FAANG Earnings Review: Google Favored Heading into Q3

Heading into Q3, the market has strong topline expectations for FAANG. As shown in the chart below, Apple, Google and Facebook have seen their topline growth estimates for 2021 increase the most this year, up 20%, 17% and 15%, respectively.

Amazon’s growth projections have risen 6% since the start of the year but were adjusted down after its Q2 earnings, while Netflix’s sales estimates have remained fairly static all year. A surprise to the upside in topline growth would likely lead to a higher valuation for FAANG, which would be bullish for the entire market. 

Changes in 2021 Sales Estimates for FAANG

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Next, we look at the changes in FAANG’s forward P/S ratio during 2021 (shown below). Google’s forward P/S multiple is up the most YTD out of the FAANG stocks, increasing nearly 60% YTD to 7.5x. On the other hand, Amazon and Apple’s multiples have remained fairly static all year. An increase in a company’s P/S ratio can signal that the market is pricing in higher rates of growth going forward.

As we can see from the below chart, FAANG sold off, as did most tech stocks in September.

However, Google has regained most of its multiple compression since the September tech sell off, while Netflix’s P/S multiple held up during the sell-off and has outperformed the group since September. The recovery in Google and outperformance in Netflix’s valuations since September is a sign of strength, and the market may be pricing in a higher growth rate for the two names heading into Q3 earnings. 

 Changes in Forward Price to Sales Multiples for FAANG

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The last chart we will review is analyst’s price targets for FAANG going forward. The below chart highlights that analysts have increased their price targets for each FAANG constituent since the start of the year. Google’s price targets have seen the most dramatic increase, and notably this was done after each earnings release.

Netflix’s price target has also been trending up recently, likely in response to the company’s viral hit, Squid Games. While Amazon’s price target is up 9% YTD, analysts lowered their price targets for the company after its Q2 earnings.

Changes in Analyst Price Targets for FAANG

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In conclusion, FAANG is an important group of stocks that generally dictates the broader market. Heading into Q3 earnings, the market has high expectations for Google, as the company’s multiple has increased the most YTD, likely due to a 17% increase in sales estimates and a 67% increase in its price target YTD.

On the other hand, analysts have tempered their expectations for Amazon, as its sales estimate and price target were reduced following Q2 earnings. Looking forward, it will be important to watch Google’s results to see if its outperformance will continue. Moreover, Netflix appears strong, as the company’s valuation held up during the September tech sell off, and its price target has been trending up recently. As a group, if FAANG outperforms analyst expectations, then this should lead to strong returns for both FAANG and the general market.

Beth Kindig from I/O Fund

Beth Kindig (@Beth_Kindig) has ten years of experience in competitive analysis and product analysis in the tech industry dating back to 2011. Considering tech growth stocks took off after the financial crisis, she is an experienced professional in every sense of the word.

Disclosure: Beth Kindig and the I/O Fund may own shares in any of the discussed companies and do not have plans to change their respective positions within the next 72 hours. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies.

 

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