COMMENT: The FAANG stocks — Facebook, Apple, Amazon, Netflix and Google — have been leading the US sharemarket higher and higher.
The five companies have a combined sharemarket value of US$3391 billion ($5000b) and an average return of 46.5 per cent over the past 12 months.
Netflix is the standout performer with a 12-month return of 92 per cent, followed by Amazon with 72 per cent, Google 34 per cent, Apple 29 per cent and Facebook 6 per cent.
The big question this week was whether Facebook's second quarter outlook comments would have a negative impact on the FAANG stocks and overall sharemarket sentiment.
Facebook was founded by Mark Zuckerberg and three other Harvard University students in early 2004. Later that year, Facebook moved to a small office in Silicon Valley, California, and Peter Thiel invested US$500,000 in the company.
In 2008 Facebook surpassed Myspace as the most used social media website and in April 2012 it acquired Instagram for US$1b.
A month on, its IPO raised US$16b, which valued the company at US$104b. This was the largest valuation for a newly-listed company at the time.
Its sharemarket value soared to US$630b at the market close on Wednesday, with Zuckerberg's 12.8 per cent shareholding worth US$80.5b. Vanguard, the passive fund manager, is the company's second largest shareholder with a 6.0 per cent holding.
After Wednesday's market close, Facebook announced net earnings of US$5.1b for the June 2018 quarter compared with US$3.9b for the same quarter in the previous year.
The social media group revealed it had 1.5 billion daily users and 2.2 billion monthly users, with growth rates of 30 per cent over the past two years.
It generated revenue of $13.3b in the latest quarter, 98.5 per cent from advertising, compared with US$6.4b in the same quarter two years ago.
However, the company's share price plunged 17.3 per cent in after-hours trading, from US$217.50 to US$179.90, after executives warned revenue growth rates would decline and profit margins would compress.
Chief financial officer David Wehner said profit margins were trending towards "mid-30s on a percentage basis", compared with a second-quarter margin of 44 per cent.
The stock fell a further 2.0 per cent, to US$176.26, on Thursday with the value of Zuckerberg's Facebook shareholding plunging a whopping US$15.7b in just 24 hours.
This illustrates the dramatic impact of earnings downgrades on high-growth companies.
Apple, the world's most valuable listed company, was incorporated by Steve Jobs and Steve Wozniak in Cupertino, California in 1977. Its largest shareholders are Vanguard with 7.1 per cent, BlackRock 6.5 per cent and Warren Buffett's Berkshire Hathaway 4.9 per cent.
The company reported a decline in 2016-year net earnings to US$45.7b, from US$53.4b in 2015, mainly because of the weakness of foreign currencies against the US dollar and a decrease in iPhone sales.
Earnings rebounded in 2017, primarily driven by growth in iPhone, Mac and Services (mainly Apple's App Store and Apple Pay) revenue.
The first two quarters of the current year were encouraging with record three-month earnings of US$20.1b for the first quarter due to "broad-based growth that included the highest revenue ever from a new iPhone line-up".
For the second quarter, the company reported "strong revenue growth in iPhone, Services and Wearables (mainly watches)".
Apple will announce its third quarter result next Tuesday (the company has a September 30 balance date while the other FAANGs have a December 31 balance date).
Amazon was incorporated by Jeff Bezos in Seattle, Washington, in 1994 as an online book retailer.
Its indicative 1997 IPO price was set in the US$12-$14 range but its final issue price was US$18 a share. The IPO raised US$54m, valuing Amazon at only US$0.44b.
Amazon passed Wal-Mart as the most valuable listed retailer three years ago and it now has a share price of US$1808.00 and market value of US$880b, compared with Wal-Mart's market value of US$260b. Bezos' 16.3 per cent stake is worth US$143b at Amazon's current share price.
In the last full financial year Amazon reported revenue of US$177.9b and net earnings of US$3.0b while Wal-Mart had revenue of US$500.3b and net earnings of US$9.9b. These figures indicate investors place a higher value on high-growth online firms than traditional bricks and mortar retailers.
Amazon released its second quarter earnings after the market closed in New York on Thursday. It showed revenue for the three-month period increased by 39 per cent, to US$52.9b, on a year-on-year basis and the company had net earnings of US$2.5b compared with US$0.2b in the same quarter last year.
The company released reasonably optimistic third quarter guidance and its shares rose 3.2 per cent in after-hours trading.
Netflix was founded by Reed Hastings and Marc Randolph in California in 1997. It listed on the Nasdaq in 2002 after issuing 5.5 million shares to the public at US$15 a share. At the US$15 a share IPO price, Netflix was valued at just US$0.31b. The company has a current sharemarket value of US$158b.
Netflix's three largest shareholders are investment managers Capital Research and Management Company with 11.4 per cent, Vanguard 6.8 per cent and BlackRock 6.2 per cent.
Netflix had a strong, rather than a stellar, second quarter. It ended the quarter with 130.1 million worldwide members compared with 104.0 million at the end of June 2017. The company was expecting slightly stronger growth even though US domestic members grew by 5.5 million during the year and international members by an impressive 20.7 million.
Netflix is forecasting global membership growth of 5.0 million in the third quarter compared with 5.3 million in the same quarter last year.
Google was launched in 1998 by Larry Page and Sergey Brin, two students at Stanford University. Eric Schmidt was hired as Google's first CEO in 2001.
Three years later the company had its IPO at US$85 a share, giving Google a market value of US$23b. The search engine is now valued at US$888b.
Vanguard is the largest shareholder with 6.3 per cent, followed by Page with 5.7 per cent and Brin 5.5 per cent. The Page and Brin shareholdings are now worth US$51b and US$49b respectively.
Google announced net earnings of US$3.5b for the three months to June compared with US$3.2b for the same period in 2017.
An important feature of the results was that the June 2018 quarter figure was after a US$5.1b deduction for a European Commission (EC) fine and the June 2017 quarter was after a US$2.7b EC fine.
The 2017 fine was in relation to Google's display and ranking of shopping search results and ads that infringed European competition laws. This year's fine is based on Google's Android-related distribution agreements that also infringed European competition laws.
FAANG companies continue to have growth opportunities but are being impacted by security issues and fines.
Facebook will invest heavily in security following its connection with the Russian/Cambridge Analytica relationship and the impact this had on the 2016 US Presidential campaign.
Facebook's headcount has increased 47 per cent, to 30,275, over the past 12 months and the company wants to hire an additional 20,000 employees by year end. These new employees will review posted content and work with the company's security team.
European legislation to protect a user's online data, known as the General Data Protection Regulation, has also cost Facebook about one million European users.
Although Amazon's result on Thursday was a relief after Facebook's disappointing announcement the day before, the FAANG stocks will continue to face challenges.
Their response to these issues will determine their long-term growth prospects.
- Brian Gaynor is an executive director of Milford Asset Management which owns shares in Amazon and Google on behalf of clients.