Prospects for Big Tech in 2019 are Mixed but Generally Good
Big tech, as epitomized by the so-called FAANG stocks, Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOG: GOOGL) led the market this year, in both directions. They were some of the strongest gainers among big names in the first three quarters of 2018, then some of the biggest losers after things turned around in October.
Based on that, they are market leaders in another sense too, the sense that where they go, others will follow. That makes an assessment of the prospects for the group in 2019 an exercise with a broader purpose, one well worth undertaking.
The first thing to be said is that while lumping these stocks together is convenient and seems somewhat logical, it no longer makes as much sense as it did when Jim Cramer first came up with the acronym in 2017. Each company is independent of course, with its own issues and opportunities going into the new year, but it can also be argued that they are at different stages in their development as corporations.
The potential problems for Facebook and Google are largely regulatory; Apple’s are those of a mature manufacturing company. Meanwhile, for Amazon and to a lesser extent, Netflix, are still about meeting expectations for and managing rapid growth. It makes much more sense, therefore, to look at each individually. When you do that, the most interesting stories are for Facebook and Amazon.
Facebook’s woes started earlier than the others this year with the reporting of the Cambridge Analytica scandal in March. Prior to that there was a kind of tacit understanding among users that their data was being used, but something about it being used for political gain struck a nerve. Still, after a big earnings beat in April, FB recovered quickly and surged to new highs.
The July earnings report, however, showed that the scandal and the changes Facebook made in its wake were having real effects. Earnings missed expectations, but it was the company’s forecast for significantly lower growth that caused the biggest one day drop in the stock’s history.
For a company previously seen as the epitome of a growth stock, that was a huge blow, but what got lost is that FB was, and is, still growing, at least in terms of profit. They reported a significant bottom-line beat on October 30, on roughly as expected revenue. That suggests that they have adjusted to their new reality and trailing and forward P/Es of 20 and 18 at current prices are pretty average. That makes FB attractive in some ways going into 2019, as any hint at a return to revenue growth would cause a significant pop.
What will probably haunt FB next year though, is the change in attitude to the company we saw this year from governments around the world. It wasn’t that long ago that Zuckerberg et al were being lauded for their role in the Arab Spring and seen as a kind of advanced guard for the forces of democracy and freedom.
The Cambridge Analytica affair changed all that.
All of a sudden, Facebook became a potential threat to politicians, so it is no surprise that at that point, talk of increased regulation and even taxation based on users began to be heard. Mark Zuckerberg and his senior officers were grilled by Congress and questions about the company were raised in the U.K. Parliament and at the E.U. as Facebook became the political punchbag of the year.
That change of attitude will presumably continue to weigh on the stock next year. Based on the Q3 earnings it is likely that Facebook will continue to grow profits, even in that environment, so when stocks in general reverse, which they will at some point, the stock can bounce. That bounce, however, will be subject to uncertainty and news on the political and regulatory front, so may be somewhat limited.
FB therefore offers the prospect of solid if unspectacular returns, but AMZN represents a better chance for investors looking to outperform the market during a recovery.
One could argue that they too have political problems, but theirs are in the much less threatening form of Presidential tweets. Traders and investors have learned to pay little attention to Trump’s rants against individual companies, and it seems unlikely that the President will be focused on Bezos early next year anyway, given the other problems he will probably face.
If the Mueller probe and other political considerations occupy Trump, that will enable traders to focus on what really matters for AMZN, their holiday season performance, and it is hard to imagine that being anything but good. Anecdotal evidence is notoriously unreliable, but this year it seemed to me that everyone has finally given in to the need to shop online.
Even my somewhat tech-challenged 81-year-old mother in law, frustrated by trying to find things in the sizes and colors she needed at brick and mortar stores, ordered most of her gifts from Amazon this year.
Amazon fell around thirty percent from its highs in the Q4 slump, but during the year beat EPS expectations spectacularly in each of the last three quarters. What is even more noteworthy is that they have done that even as they have continued to expand their own logistics network, investments that will pay off for a long time in the form of lower costs.
Much of this drop has been about fear rather than reality, and in AMZN’s case it certainly looks as if the stock has been punished in spite of, not because of, the company’s performance. Fear fades though, so a sharp bounce in AMZN seems logical early next year.
Of the other FAANG stocks, Apple looks the most like Amazon, with continued growth but lowered expectations, while Google has some similarities to Facebook in terms of regulatory issues. Netflix is its own animal, where increasing competition makes programming decisions the key to next year’s performance. In general though, big tech stocks, which led the market down at the end of this year, look likely to lead the market back up in 2019, so should be first on the list of those looking to buy the slump.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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