Apr 7 2020 - FAANG Stocks: Making 5 Short-Term Technical Calls Ahead Of Q1 Earnings

Summary

We analyze FB, AMZN, APPL, NFLX, and GOOGL stocks on technical merits and make predictions on how the market initially reacts to their  earnings results.

We make short-term technical Long calls for AMZN, APPL, and NFLX.

At the same time, we make short-term Short calls for FB and GOOGL.

This article focuses on the technical analysis, rather than fundamental equity research, for five famous FAANG companies: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOGL). As you read this article, please keep in mind that we are mostly driven by trends, rather than specific revenue or EPS numbers. One could obviously write volumes about each of these names, which are also widely covered and heavily traded. However, if there was ever a quarter to prioritize technical trends over fundamentals, this is it!

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If during previous quarters each of these five stocks could rally on earnings beats or crater on downward guidance revisions, this time around market response will be a lot more based on technical conditions: for instance, how oversold or undersold each name is. Nearly all of them touched all-time highs in mid-February, before nosediving on coronavirus developments.

Below, we analyze FB, AMZN, APPL, NFLX, and GOOGL stocks on technical merits and make predictions on how the market initially reacts to the earnings results. By "initially" we mean the first 24 hours. Recall that each of these names has an above-average beta, making a 10-15% move in either direction likely in the aftermath of the first earnings print of the coronavirus era.

That in itself creates room for short-term calls on each of these names. We once again emphasize that these are VERY short-term calls, only into the upcoming quarter.

Facebook (FB) - SELL

As of Friday, April 3 close, FB was ~31% below its all-time high, which represents the steepest decline, when compared to other FAANG names (Google came close with a 29% decline). FB shares are also meaningfully below their 200-day moving average of 2. If we look at the last earnings report, Facebook was the only FAANG stock that saw its shares pull back. In our view, this relative weakness, as well as concerns over the near-term ad spend, continue to linger into the first quarter earnings.

We expect FB shares to take further beating when the company reports earnings on April 22. Specifically, we expect FB to retest its annual low of 7, which would take it approximately 12% below the April 3 levels, or potentially go lower if FB shares further decline with the market in the next two weeks. Our "into the first quarter" technical rating is a Sell.

Amazon (AMZN) - BUY

For technical analysts, the fact that Amazon actually finished first quarter higher, relative to December 31st, is a significant differentiator. AMZN shares were approximately 5.5% higher on March 31, representing the only FAANG stock and one of the few names in the S&P 500 index to accomplish this feat. (Microsoft (MSFT) is another major company to see its shares rise during the first quarter, though Microsoft is obviously not part of the FAANG family). On March 31, AMZN shares were also at their 50-day moving average. We note that during several daily market routs in February and March, AMZN shares often declined in line with the S&P index; however, in late March, as investors moderated some of the panic selling and began to reevaluate Amazon's positioning in the online space, we saw Amazon make a meaningful comeback and on March 30 finish mere ~10% below its all time high of 2185.

As we assess its path forward when the company reports earnings on April 23, we see a strong probability for AMZN shares to reclaim that all-time high or potentially push higher into the 2200 range. A further upside of 10%-15% is entirely possible, and a lot will depend if Amazon will retreat to the 1700-1800 range in the coming days ahead of the earnings, most likely revisiting the 200-day moving average of 1855. Recall that FAANG names rarely all decline in the aftermath of earnings; this didn't happen even during the watershed fourth quarter of 2018. FAANG investors frequently reposition investments from one FAANG name into another: AMZN is well positioned to trend well and continue growth during the quarter. Once again: actual numbers or guidance implications may be secondary at this stage. Therefore, our "into the first quarter" technical rating is a solid Buy.

Apple (AAPL) - BUY

As a hardware company, Apple is at a disadvantage, relative to other FAANG names. Online sales simply cannot fully make up for in-store sales for high-ticket items, such as iPhones and iPads. Furthermore, Amazon strongly depends on its "Geniuses" team for technical support, which strongly facilitates sales. This is one of the key reasons why Apple shares, like those of Facebook and Google, currently sit firmly in the bear territory, about 27% from their highs. However, there is one differentiating factor that sets Apple aside from Facebook in this environment and make it a short-term Buy. The company's stores have already been shut in China during the first quarter (recall that Apple was one of the first companies to issue a downward guidance revision in mid-February) and have since re-opened, approximately at the same time as the company has been temporarily closing its physical stores in the United States and Europe. In fact, capacity is restored to pre-coronavirus levels, with all 42 China stores now open (See Article), and we believe the company can make up for Q1 losses (in China) during the second and third quarters. In other words, despite incurring losses in other parts of the world at present, Apple has successfully shown what the world could be like in the post-pandemic environment. It is a prime example of the V-curve, if you will.

It is understandable that investors treat Apple like any other hardware company, which helps explain why at the April 3 closing price of ~1 it currently sits below its 50-day moving average (6) and 200-day moving average (1). However, we strongly believe that much of the medicine has already been taken, as heavy volumes accelerate into buying and much lighter volumes manifest themselves during sell-offs. Even if the company misses estimates and withdraws guidance during its next earnings call, we increasingly see a swarm of investors fishing for the bottom. And, while the 4 recent coronavirus low set on March 23 may be retested at some point, we believe that the post-quarter response is likely to be a positive one. Therefore, our "into the quarter" technical rating is a Buy.

Netflix (NFLX) - BUY

Some believe that Netflix is a near-perfect coronavirus stay-at-home stock. It was loved by investors before the virus, hovering around all-time highs, and it was near its highs just when the market was going through one brutal rout after another. We note that during the worst rout NFLX shares only briefly dipped below their 200-day moving average of 3, while on April 3 the closing price was 1, just a buck above the 50-day moving average. There is a lot of faith in the stock that will likely see subscriptions surge by double digits long after the coronavirus scare is over, since the virus is likely to create a new homebound community in the medium to long run, particularly among the elderly and those who will practice risk aversion amidst the COVID uncertainty.

When NFLX reports first quarter results, we doubt that the first quarter numbers will fully reflect the company's potential (since the surge in subscriptions likely began only in March). Nor can we put much faith in the updated guidance, should management choose to provide one, since it is immensely difficult to calculate revenue surge amidst a number of healthcare unknowns. Rather, we expect investors to get a "comfortable vibe" from the earnings call, which would lead to a rally in shares in the call's aftermath. We believe that breaking into the 0-0 range is a real possibility. Therefore, our "into the quarter" technical rating is a Buy.

Google (GOOGL) - SELL

Google had some rough patches in 2019, which quickly dissipated when the company reported fourth quarter earnings in January, sending the stock to its all-time high of ~30. In 2020, Google's story was supposed to be about ad revenue, which prompted a number of sell-side analysts to revise their targets closer to the 00 milestone. However, what promised to be a major tailwind actually translated into the company's headwind in the post-coronavirus world. Just like with Facebook, there is increasing uncertainty surrounding the upcoming ad spend, and given that thousands, even tens of thousands, small businesses are getting either closed down or may face bottom line pressures, it is virtually impossible to accurately prognosticate the trajectory of the ad spend. We have never seen such a divergence in ad revenue estimates for Facebook and Google; any present trades on fundamentals may be meaningless, thus paving the way for technical calls.

From a technical standpoint, Google's close price of ~92 on April 3 stands at 17% below its 50-day moving average of 17 and 14% below the 200-day moving average of 67. In the days ahead of the earnings, we expect the 200-day moving average to act as a support level, with GOOGL shares approaching it but not going higher. However, when the company reports earnings, we expect GOOGL shares to fall another 10%-15%, likely approaching or going below the ,000 level (which is likely the support level on the other side of the range). Our "into the quarter" technical rating is a Sell.

RISKS TO OUR THESIS

We once again emphasize that this article is making only calls into the next quarter, with the five FAANG names slated to report earnings in the next two-four weeks. Our Buy and Sell calls should not be misinterpreted for long-term analyses, nor should they be judged on some fundamentals, since these ratings are entirely driven by technical trends.

As such, we have two core risks to our short-term thesis.

1) Major improvements in coronavirus situation: While this development would be a blessing for the mankind, we note that any improvement in the coronavirus situation (such as faster-than-expected flattening of the curve or development of anti-viral treatment) would shift analysis from the technical side to the fundamental, and would lead us to withdraw our short-term technical calls in to the quarter.

2) Major market routs: Should we see another wave of market routs, with the S&P 500 index registering falls of 5% or greater, we may need to reevaluate the ranges of our technical calls.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In addition to having long positions in AAPL, my firm also has positions in FB, AMZN, NFLX, and GOOGL shares.

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