After a rough January, the month of February has started off well. Much of the carnage seemed to stop after Apple’s earnings report came out. After that, Microsoft and Alphabet (Google) reported and looked very strong. Apple is up close to 10% since reporting, and Google was up about 7.5% on Feb 2. On the flip side, we have PayPal (PYPL), Netflix (NFLX) and Meta (Facebook, FB). These stocks have been hammered due to lower than expected earnings and forward guidance. As of last week, FB was down about 25%!
While we don’t normally get into individual stock reports, these companies can move markets. Take a look at the top holdings of the ETF QQQ, which mirrors the NASDAQ 100 index.
(Note: PayPal = 1.48%, Netflix = 1.45% )
These companies also play a major role in the S&P 500. Remember, the average stock was in “correction” territory late last fall. It was these mega-cap names that held up the market. They faltered in January, which led the S&P 500 and NASDAQ 100 dropping a good bit. So far this earnings season, it appears the market is reacting (maybe over-reacting) to both good and bad earnings news.
In case you are interested in getting into the weeds, here is an analysis of FB and PYPL by one of the analysts at Aptus, David Wagner, CFA.
- Meta (FB)– It was a perfect storm to hit Facebook Meta as they guided poorly regarding their FY Q1 2022 earnings – but, at its core, I guess it’s better to invest in growth than to stay stagnant?
- Earnings: While Q4 revenues were in-line, pressure on Q1 growth was more pronounced than anticipated, as Meta deliberately shifts towards lower-monetizing video content compounding impacts from tougher comps, FX translation and Apple’s privacy changes. Obviously ad spending was the black eye of the guidance. Looking further ahead, we see Q2 trends somewhat similar to Q1 before 2H growth benefits from easier comps, more tools to combat privacy headwinds, and presumably improving video monetization. With Q1 guidance out of the way, we continue to see a brighter path for shares once investors focus on re-accelerating double-digit growth in 2H.
- Valuation: We believe after hours valuation is attractive at ~13x 2022E Core EPS vs. mid-teens LT EPS growth.
- PayPal Holdings (PYPL)– Long Road to Redemption Here In My Opinion, as PYPL’s Strategy Pivots Away from User Growth
- Earnings: The call shed more light on the startlingly low Net New Active Account guide for FY22, as management has pivoted towards driving more engagement from high-value customers, & pulled the target of 750M active users by FY25. We view the market’s reaction to this report as justified. At Aptus, we think that PYPL needs a new direction, thinking that to drive growth they need more physical POS processing, something which may require M&A – which is not likely under the current management team.
- Valuation: We believe that valuation remains the biggest worry here, outside that the market may be too optimistic on LT growth now. Given our POS comments and the company needing a new direction, PYPL shares could trade at a discount to Visa (V) and Mastercard (MA).
Please contact me to discuss how these earnings reports impact your investments.