David Garrity on Bloomberg: Regulation Threatens Facebook’s ’Zero’ Cost of Data

We call Amazon, Facebook and Alphabet/Google “non-Tech Tech” because all three are clearly Technology companies but none are actually in the S&P Technology sector. The first is in the Consumer Discretionary bucket and the latter 2 appear as the top weightings in Communication Services.

Whatever you want to call these mega-cap disruptors, they have an outsized influence on the S&P 500:

  • -They have a collective weighting of 8.0% in the index.
  • -If they were their own sector, they would be more important than 5 other groups: Consumer Staples (7.4%), Energy (4.9%), Utilities (3.3%), Real Estate (3.1%), and Materials (2.7%).
  • -Put another way, these 3 companies are almost as important (8.0% weight vs. 9.1%) to the S&P 500 than the combined effect of Utilities (27 companies), Real Estate (31 companies) and Materials (27 companies).


The long and short of it is that Amazon, Facebook and Google are systematically important enough to merit attention when they report earnings even if you are a generalist portfolio manager or investment advisor.
All three are on deck this week, with FB reporting on Wednesday and AMZN/GOOG(L) on Thursday. And as much as one might associate these names with +20% earnings growth supporting outsized valuations, their Q2 expected results are anything but uniformly spectacular.

Here’s how Wall Street analysts see Q2 results for each, along with current valuations:

 

Amazon (3.3% of the S&P 500, 23% of Consumer Discretionary)

  • -Expected EPS growth: +10%, to $5.58/share
  • -Expected revenue growth: +18%, to $62.4 billion
  • -Current 2019 consensus estimate: $27.41/share, up +36% from 2018
  • -Current valuation: 72x 2019 EPS


Our take: AMZN faces a classic “tough comp to last year” problem, when it beat analysts’ numbers by 100%.
Still, to maintain its lofty valuation it will have to at least show stable margins by logging earnings growth of +18% – not the 10% baked into analysts’ estimates.

Facebook (1.9% of the S&P 500, 20% of Communication Services)

  • -Expected EPS growth: +7.5%, to $1.87/share
  • -Expected revenue growth: +25%, to $16.5 billion
  • -Current 2019 consensus estimate: $7.10/share, down -6% from 2018
  • -Current valuation: 28x 2019 EPS


Our take: FB faces real margin pressures as it continues to upgrade its platform to keep global regulators at bay
. The best case here: enough of a beat that 2019 earnings resume a modest growth trajectory rather than current expectations of a decline.

Alphabet/Google (2.8% of the S&P 500, 23% of Communication Services)

  • -Expected EPS growth: negative -3.6%, to $11.33/share
  • -Expected revenue growth: +17%, to $38.2 billion
  • -Current 2019 consensus estimate: $45.67, up +4.5% from 2018
  • -Current valuation: 29x 2019 EPS


Our take: Google has missed expectations the last 2 quarters on a combination of revenue misses and higher expenses as it bolsters its cloud computing business.
As a result, it is the only one of the three major “non-Tech Tech” companies expected to post an outright decline in EPS this quarter. Based on those 2 points, Google clearly has the most to prove when it reports on Thursday but (hopefully) the lowest bar as well.

Bottom line: as much as we focus on Fed policy and interest rates, how these 3 companies performed in Q2 will be important market drivers in the week ahead.

Full replay here.