Amazon, Facebook reasonably valued ahead of earnings: David Garrity on BNN

With tech earnings season getting underway this week, GVA Research Principal David Garrity joins BNN for a preview and tells The Business News why he sees Google, Amazon and Facebook valued “reasonably”.

4Q16 Earnings Season Underway This Week

 The U.S. technology sector reporting season kicked off last week with NFLX (Wed 1/18) and IBM (Thurs 1/19). Results from both were well-received and the companies’ shares reached new 52-week highs in response. However, the technology sector as a whole has been lagging the broader market indices since the November 2016 U.S. Presidential Election as investors sought out more cyclical sectors such as financials and industrials expected to benefit from the Trump Administration’s economic stimulus and regulatory & tax reduction programs. The technology sector would benefit from tax reduction to the extent it allows the repatriation of overseas profits, but there are possible concerns relative to Trump’s trade protectionist statements that may lead to rising tariff barriers. Consequently, apart from the companies recently reporting results, technology stocks have taken a breather such that on average it has been over 2 months since they have recorded new 52-week highs. This week will offer a test of whether the sector can regain its market leadership position.

YHOO will release results after the close Mon 1/23

With acquisition discussions underway with VZ, investors should note the valuation is elevated relative to the company’s expected growth rate with its current “price-to-earnings-growth” (P/E/G) ratio standing at 5.36. While the valuation is high, YHOO’s ownership stake in BABA manages to sustain investor interest.

AAPL will release results on Tues 1/31

 Despite the iPhone7 September 2017 launch, financial performance is expected to be flat as consumers are holding off upgrading smartphones until the expected September 2018 iPhone8 introduction. Meanwhile, with hardware sales showing only modest growth, we expect investors will focus on what growth potential AAPL can realize from its software & services sales through the App Store, a channel with potentially high margins off a revenue base in excess of $20bn. AAPL shares’ valuation at a 1.25x P/E/G ratio does not appear stretched, but investors should note share price appreciation is likely to be driven by the timing of and announcements related to the upcoming iPhone8 introduction.

FB results will be out Wed 2/1

The company is expected to deliver sector-leading sales and EPS growth, reflecting its rising importance to online advertising. However, management needs to offer clear commitment to addressing in a substantial, committed manner the company’s role in distributing “fake news”, an area of significant concern around the recent U.S. and upcoming E.U. elections. FB share valuation relative to its underlying growth prospects is the most reasonable amongst the peer group at a 0.92 P/E/G ratio.

AMZN reports on Thurs 2/2

AMZN is expected to turn in another solid quarter for both sales and EPS growth driven by both year-end holiday shopping and the expansion of its cloud computing operations. Given CEO Jeff Bezos’ interest in the Washington Post, investors should be at least aware that the Trump Administration may take greater regulatory scrutiny in examining AMZN operations. That said, AMZN shares’ valuation at 1.12x P/E/G ratio appears reasonable.