Thursday Calm Before The Storm
The stock market rallied nicely on Thursday as both the S&P 500 and the Russell 2000 rose 1.19%. Plus, the Nasdaq rose 1.64%. Tech stocks rose into earnings. Twitter, Apple, Facebook, Amazon, and Alphabet all reported after the close. They all fell after their earnings reports after hours except Alphabet.
And the market looked to FAANG to save it, but this time they largely failed. It's clear the market’s leadership is gone. That’s why the futures market crashed on Thursday night. Without these stocks, the market has nothing to keep it up. Only question is if small cap value will outperform in this correction.
Value investors have gotten none of the upside this year. It would make sense for them to avoid the downside, but we don’t know what will happen. This is a coordinated panic.
Twitter Crashes On Earnings
Twitter actually beat estimates on the top and bottom line, but its tough comp caused a very small increase in users which sent the stock crashing. The firm reported 19 cents in adjusted EPS which beat estimates for 6 cents. Investors don’t care as much about profits as they do about user growth because this isn’t a value stock. The firm trades at 54 times 2022 expected earnings.
Unless they destroyed estimates and raised profit guidance because they created a new way to monetize users, investors are always going to focus on user growth. User growth is the top of the funnel. Next comes sales and then come profits. Speaking of sales, they were $936 million which destroyed estimates for $777 million. Online ad spending came back.
A problem for Twitter is it had 187 million monetizable daily active users which dramatically missed estimates for 195 million. That’s 29% yearly growth, but only a 1 million increase from last quarter which was the lowest increase since Q4 2017 as you can see from the chart below. You can understand why Twitter barely added users.
20 million new people joined Twitter in Q2 to learn more about the pandemic. All that user growth pulled forward growth from the rest of the year. There weren’t many people left to join Twitter and there wasn’t a new reason to do so. If anything, Twitter has become so stressful that it makes sense to avoid using the platform.
Twitter stock ramped up 8.1% into this quarter which was like leading a lamb to slaughter. Also, Twitter is always a trade, never an investment. It can’t stay above its IPO price. Their stock crashed 17.5% after hours. Investors are lucky this isn’t one of the big cap companies or the market would have tanked further. Twitter isn’t that important to the market. It might take some of the life out of Pinterest and Snap which have been exploding.
Facebook Reports Good Earnings, Stock Falls
Facebook didn’t report terrible numbers like Twitter, but it still fell 2.7% after hours. It’s bad for the market if one of the better reports still caused a decline. Specifically, Facebook reported $2.71 in EPS which beat estimates for $1.91. Sales were $21.47 billion which beat estimates for $19.8 billion. As you can see form the chart below, sales growth was 21.6% which was the 2nd slowest in the firm’s history.
Facebook had 1.82 billion daily active users which beat estimates by 30 million. It had 2.74 billion monthly active users which beat estimates by 40 million. ARPU was $7.89 which beat estimates for $7.32. As you can see from the chart below, users in America and Canada fell 2 million to 196 million. This usually doesn’t happen.
Maybe people are switching to Tik Tok or other platforms. There was no sequential growth in Europe. That means Facebook’s highest ARPU regions all had no growth or lost users.
Maybe Facebook’s growth story is closer to its end than we think. Good news is the ad boycott of top brands didn’t stop the firm because it relies on small and medium sized firms. Facebook went from 9 million active advertisers in July to 10 million.
Small businesses can wipe away the weakness from big businesses. Small firms need to advertise online now more than ever because their in-person business has been hit by the virus.
Apple Falls On Its Earnings Too
Apple also beat estimates on the top and bottom line, but saw its stock fall 4.2% after hours. The firm had 73 cents in EPS which beat estimates by 3 cents. There were $64.7 billion in sales which beat estimates by $1 billion, but only represented 1% growth. As you can see from the chart below, the firm has had flat EBIT for 5 years while the stock has risen 270%. This stock is a bubble.
iPhone revenues were down 20.7%; this is for the iPhone 11, not the new 5G models. Even still, this is a huge decline. This quarter always has sales from the older models as the new phones always come out from September to November. Work from home trend stayed in place as iPad 46% sales growth and Mac had 28% sales growth.
Services sales growth was 16.3% which beat estimates. Other products had 20.9% sales growth. Sales in China were weak as there was a 28% decline. Tim Cook hinted that later this year Apple is releasing Mac computers with Apple built chips. This is a perfect time as the work from home trend is still going.
Conclusion
Most of the big tech firms reported at once. Since they all fell after hours except Alphabet, that’s bad news for the market. Even if you think their results were good, it’s bad they sold off. A sign of a top is when stocks decline on good news. A sign of a bottom is when stocks rally on bad news. An example of that is how oil stocks were unbothered by oil prices going negative this spring.