FAANGs earnings season: Top picks as tech stocks trade near all time highs

The tech sector is back trading around all time highs as the reflation trade buckles and ahead of earnings. Take a deeper look into Apple, Alphabet and Facebook ahead of their numbers later in the month.

Tech (2)

Heading towards US tech stocks earnings seasons the Nasdaq is trading around record high. This is quite a turnaround from where we were at the end of the last tech earning season in April/ May.

Rotation out of tech

Three months ago, big tech reported impressive figures, beating expectations and even upwardly revised expectations and yet the share prices initially fell lower. This was because the reflation trade was in full swing.

The growth outlook was soaring, inflation expectations rising and bond yields surging. High growth stocks such as tech stocks, which are particularly sensitive to the interest rate outlook, fell out of favour amid a rotation into value. Cyclicals rallied and the Dow Jones hit an all-time high.

And back in again

More recently the reflation trade is in retreat. Growth expectations have soured, reflected in falling US treasury yields which tumbled to a 4-month low, reigniting the rotation back into high growth tech stocks and boosting the Nasdaq to a fresh all-time high earlier this week.

Economic data in April and May particularly was persistently beating forecasts, more recently data has been on the softer side. The Citigroup economic surprise gauge, which measures the extent to which reports are beating or missing forecasts has fallen to its lowest level since February. Peak growth appears to have been reached. The economy is still growing, just at a slower rate and the market is pricing that in and returning to tried and tested growth names.

Earnings season

Expectation are high. Bloomberg forecast 59.8% growth in EPS, the largest jump since 2010. However, this is mainly owing to weaker comparison as the economy was as good as shut down in Q2 last year.

However, it’s worth keeping in mind that tech stocks will mainly be up against tougher comparisons from last year than in the previous quarter as these are the stocks which shone across the pandemic amid the WFH dynamic and accelerated digitalization.

Here’s my pick of the top big tech stocks watch this earning season:

Big tech to watch in earnings season:

Is Apple a buy?

Fiscal Q2 was a stellar quarter for Apple. Revenue roared 54% in Q2, reported in April, and EPS $1.40 versus $0.99 forecast so the bar is set high. That of course was an easy comparison for the year earlier. iPhone 12 sales are going to be in focus with expectations for some resilient numbers. The higher end product line up is expected to outperform, which should be good news for margins. Furthermore, the fast growing services businesses has been boosting gross profit margins as it is about twice that of its product business. Q3 revenue is expected to rise 22% YoY, up against a tougher comparison.

Where next for Apple share price?

Apple traded between $115 and $135 for most of the first half of 2020. More recently $122 capped the downside, with Apple share price rebounding off this level in early June to rally hard to $144.89 just shy of the January all time high of $145.09.

Still, the share price trades 9% so far this year, lagging the double-digit growth of some of its peers. The Nasdaq trades around 15% higher so far this year.

The recent pullback in the share price yesterday is bringing the RSI out of overbought territory. With no key levels breached so far this looks to be a technical correction rather than anything more sinister. A move below $137 the April 29 high and the ascending trendline could negate the near term uptrend. A move below the 50 & 100 sma around 128 could see the sellers gain traction.

Alphabet - the  king of online advertising

Alphabet has had a stellar year, the share price has rallied 44% so far. This is because Alphabet has managed to benefit in part from the reopening play as well. Alphabet’s earnings more than doubled in the latest quarter compared to a year earlier thanks to the resurgence in online advertising. With businesses reopening they go online to promote themselves. Alphabet is expected to continue generating strong growth on the back of its dominant advertising, streaming and cloud computing. The fact that Google is facing anti-competitive allegations for the fourth time this year hasn’t seriously hindered the share price rally so far, but developments will be watched carefully.

Where next for Alphabet share price?

The share price has been going from new record high to new record high. The recent sell off seen this week appears to be just technical. No key levels have been breached, although the RSI has moved out of overbought territory. The 50 sma has offered support at several points across the rally. A move below this support at 2380 could negate the near-term uptrend. On the upside, beyond 2550 the all time high, resistance could be met around 2640 the upper band of the ascending channel.

Could Facebook report strong earnings?

Facebook crushed analysts estimates in Q1 with earnings revenue jumped 48% to $26.2 billion, well ahead of the $23.7 billion forecast. The advertising business saw a 30% yoy increase in price per ad and 12% more ad impressions. Strong momentum is expected to continue into Q2 with FB guiding for  the revenue growth rate to remain steady or modestly accelerate. This bodes well given that FB guidance is usually conservative. Also let’s not forget that Facebook is up against a rather easy year on year comparison where revenue grew just 11% as covid lockdowns meant markers reduced their ad spend.

Where next for Facebook share price?

Facebook trades within its ascending channel dating back to early March. It trades above its 50 & 100 dma, showing an established bullish trend. Today’s fall lower has seen the share price slip below the mid point of the ascending channel, however, it has traded for extending periods below the mid-point. The bias remains bullish. It would take a move below $325 the lower band of the ascending channel and the 50 sma to negate the near term uptrend and for sellers to gain traction. On the up side a move above $360 is needed for FB to reach fresh all time high.

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