- Meta Platforms, Amazon, and Alphabet earnings disappointed.
- Shares in these FAANG stocks sold off sharply.
- Here are the key support levels to watch.
Many high-profile technology companies declined significantly this week, including the FAANG stocks’ Meta Platforms (META) (formerly Facebook), Amazon.com (AMZN) , and Alphabet (GOOGL) (formerly Google). As a reminder, FAANG is an acronym for Facebook, Amazon, Apple, Netflix, and Google.
Before reporting disappointing third-quarter earnings, Meta Platforms, Amazon, and Alphabet traded as high as $138, $121, and $104 this week. Today, they're trading at $99, $101, and $94, respectively. Worse, those declines happened despite the S&P 500 index ETF SPY climbing nearly 3%.
The drop in these tech stocks reminds me of the old Wall Street adage that, eventually, sellers will come for the Generals. Arguably, all three are among the most important leaders during last year's bull market. This year, their shares have steadily declined.
For example, the social media Goliath Meta Platforms was worth over $1 trillion last year. Its market capitalization is less than $270 billion now. Likewise, internet products giant Alphabet lost more than one-third of its value since November, a staggering figure considering its market cap is over $1.2 trillion. The situation is similar for e-commerce and cloud computing giant Amazon, which is trading 46% below last year’s highs.
The crash in these three mega-cap technology companies may create a buying opportunity, but here's why you should be patient.
Terrible earnings and disappointing outlooks
Meta Platforms delivered the worst financials of any of the FAANG stocks. In the third quarter, its year-over-year revenue fell for a second consecutive quarter, and earnings per share collapsed by nearly 49% despite solid engagement with its family of apps (FOA). That’s not what you want to see from a so-called “growth” stock.
Alphabet’s revenue increased by 6% from one year ago, but its EPS also disappointed, falling 15% compared to last year.
The common thread? Declining ad demand. Meta Platforms pocketed 18% less per ad on its various platforms, including Instagram. Unfortunately, that was hardly good enough to offset losses associated with its Metaverse gambit. Meanwhile, Alphabet reported waning demand for ads on YouTube, causing YouTube revenue to slip by 2%. It also said specific industries, such as financials, reined in their search ad spend during the quarter.
At Amazon, rising expenses took a toll on profit. Revenue grew 15% to $127 billion – matching growth delivered in the same quarter of 2021 – but EPS fell 10% year-over-year because of rising costs. Operating expenses increased 17.5% year over year in the quarter, and year-to-date, Amazon’s net loss totals $3 billion versus gains of $19 billion last year.
Still, investors might have been willing to look beyond those results if Amazon offered an encouraging outlook for its all-important holiday quarter. After all, sales and profit at its Amazon Web Services (AWS) unit grew by a healthy 27% and 10% last quarter.
Unfortunately, management said revenue would range from just $140 billion to $148 billion next quarter, significantly lower than analysts’ $155 billion estimate. Furthermore, operating income could be as little as zero or as much as $4 billion in the quarter. In Morning Recon today, Real Money’s Stephen Guilfoyle pointed out Wall Street was hoping for an operating income of $3.5 billion.
Amazon wasn't the only one of the three to offer a less-than-rosy outlook. Meta Platforms guidance is for revenue of between $30 to $32.5 billion next quarter, below the $33.7 billion reported in Q4 last year.
How to trade Meta, Alphabet, and Amazon stock?
In “If You've Got a Taste for MANA (AKA the Former FANG), Here's Where to Buy,” Real Money Pro’s Ed Ponsi lays out his thinking on where bargain hunters can buy shares in these beaten-down stocks.
On Meta Platforms, Ponsi writes:
“Meta Platforms imploded earlier this week after announcing a loss of $9.4 billion on Reality Labs, the company's Metaverse unit. Worse, Reality Labs is projected to have significantly greater losses in 2023…Shares of Meta are down nearly 71% year to date. Where will Meta Platforms finally find its footing?...I'm looking at a monthly reversal candle from August 2015 as the stock's best opportunity to regroup. The low price for that month was exactly $72, so it's no coincidence I'll be buying at that level should Meta get there.”
Ponsi thinks Amazon’s stock could be closer to actionable. He writes:
”Amazon's market cap fell below $1 trillion on Thursday afternoon after the company missed revenue estimates. Shares of the world's largest online retailer dropped 15% after the market close after losing 4% during the regular session…What's the right price for Amazon? In the early days of the pandemic, the stock exploded higher after forming a bullish hammer pattern (shaded yellow). The low of that candle is $81.30, which looks like a great price to buy Amazon.”
And how about Alphabet stock? He writes:
“Alphabet's monthly candle is forming a bearish pattern (shaded yellow). Unless this stock mounts a major reversal by Monday's close, a monthly shooting star pattern will form, signifying a further move lower is on the way…A former area of resistance near $82 (black dotted line) should now act as support.”
The Smart Play
The primary trend for the market remains down because major market indexes are still beneath downward-sloping 200-day moving averages. The recent rally was powerful, but unlike other bear market bounces this year, technology stocks' performance hasn’t been compelling. For example, since the mid-month low, the technology-heavy NASDAQ 100 has underperformed the S&P 500, returning 9.7% versus 11%, respectively. Conversely, the relatively staid Dow Jones 30 (DIA) has been the best-performing major market index, gaining over 14%.
Technology’s relative underperformance could be temporary, or it could be that the rise of the DJ30 indicates investors, “worn out” by technology stock blow-ups, are more interested in less volatile and dividend income-friendly investment options. As a reminder, the DIA yields nearly 2%. That’s not great, given short-term Treasury yields are 4%, but it’s still miles north of the 0.7% yield provided by the NASDAQ 100. Remember, Meta Platforms, Alphabet, and Amazon don’t pay dividends.
That’s not to say that – at the right price – these FANG stocks aren’t interesting. A lot of the revenue drop was amplified by converting foreign sales into U.S. Dollars. Absent the currency exchange headwinds, revenue would have grown at Meta Platforms, Alphabet, and Amazon by 2%, 11%, and 19%. If the Dollar peaks and trends lower, these companies will enjoy much easier comparisons in 2023.
Furthermore, if jobs hold up and inflation falls, supporting consumer discretionary spending, advertising budgets should increase again, removing a headwind. However, there’s little evidence of that happening yet. Core PCE inflation, which the Fed uses to shape interest rate policy, grew 5.1% in September, the fastest pace since March. With companies reporting their lowest year-over-year earnings growth since COVID, the chances unemployment starts climbing is high.
Given all the uncertainty, waiting to see if these stocks reach Ponsi’s price targets may be the best bet. However, if you feel compelled to take some Meta platforms stock, Alphabet stock, or Amazon stock, use progressive exposure and a stop loss to protect your money if you’re wrong.