It’s that time of year again. Earnings season is in full swing, and investors are bracing for some bad news as companies report their second quarter results. Ahead of the upcoming prints, the Street is calling for a sharp profit decline as a result of the COVID-19 pandemic and the heavy blow it dealt to the economy.
While the results could be rough for many, the pros from RBC Capital argue that the health crisis has altered consumer behavior for the foreseeable future. To this end, the investment firm, which lands within the top four on TipRanks’ list of Top Performing Research Firms, reevaluated several large-cap names in its coverage universe before their earnings releases, locking in on two FAANG stocks poised to emerge from the crisis as winners.
Using TipRanks’ database, we pulled up the details on these two stocks to find out how the rest of the Street thinks each will fare when they publish their second quarter numbers. According to the platform, both have received plenty of love from other analysts, earning a “Strong Buy” consensus rating.
Facebook (FB)
It has been anything but smooth sailing for social media giant Facebook, with several of its advertisers boycotting the company. Still, RBC sees plenty of positives ahead of its July 29 earnings release.
Representing the firm, five-star analyst Mark Mahaney acknowledges that a potential second wave of COVID-19 cases and the resulting reinstatement of lockdowns as well as the increasing number of advertisers taking their ad spend elsewhere could spur headwinds for this FAANG stock. However, after looking at intra-quarter data, he told clients, “...we view current Street June quarter and H2:20 estimates as reasonable to modestly conservative, given a material data point that suggests a stronger-than-expected recovery in U.S. Online Ad Spend and our analysis on U.S. Political Digital Ad Spend.”
What are the exact estimates? Mahaney is calling for revenue, operating income and GAAP EPS of $17.62 billion, $4.15 billion and $1.23, respectively, versus the $17.13 billion, $4.73 billion and $1.37 consensus estimates.
During the release, Mahaney will be paying close attention to advertising revenue growth, which he believes will slow significantly from Q1. That said, the analyst sees a recovery taking place at a much faster pace than other members of the Street, forecasting a near-full rebound in Q4. When it comes to political digital ad spend, he commented, “Our analysis suggests this spend could contribute as much as 6% to FB’s H2:20 North American Ad Revenue, which we believe is underappreciated in current Consensus numbers.”
Margin levels are expected to dip, but investors could get good news when FB reports figures for user growth and engagement. Based on RBC’s eighth social media survey, FB’s penetration gained sequentially for the first time since June 2017, and the time spent and future Intent metrics notched record highs. On top of this, satisfaction and engagement for Instagram reached all-time highs, and commercial activity on Facebook Marketplace and Instagram got a boost.
Expounding on the commerce activity uptick, Mahaney stated, “By making its properties more ‘transactionable’ thru Facebook Shops, advertisers should find greater utility in its ad units, thus potentially translating to higher eCPMs over time. The uptick in commercial behavior on its sites gives us greater confidence that Facebook can further penetrate e-commerce advertiser budgets.”
In line with his optimistic take, Mahaney stayed with the bulls. In addition to reiterating an Outperform call, he kept a $271 price target on the stock, suggesting 12% upside potential. (To watch Mahaney’s track record, click here)
Looking at the consensus breakdown, most other analysts agree with Mahaney’s assessment. With 28 Buys and 5 Holds, the word on the Street is that FB is a Strong Buy. At $256.92, the average price target implies shares could rise 6% in the next year. (See Facebook stock analysis on TipRanks)
Amazon (AMZN)
With respect to RBC’s other FAANG stock pick, it’s no secret that e-commerce titan Amazon has been one of the key beneficiaries of the COVID crisis, which should be reflected in its earnings release on July 30.
Analyst Mark Mahaney, who also covers FB, recently lifted his estimates for the June quarter, now
predicting $80.7 billion in revenue. How does this compare to the consensus? It is in line with consensus as well as at the high end of management’s guidance. For GAAP operating income and GAAP EPS, the figures could land at $1.5 billion and $1.90, respectively, based on Mahaney’s estimates.
The key areas to focus on, according to Mahaney, will be the impact of COVID-related spend and operating margin trends. “We will be listening for details on AMZN’s $4 billion spend—did the company spend at expected levels; did the spend help the company get back to par in terms of speed of delivery; how much more does AMZN need to spend to get back to normal – i.e., when will One Day mean One Day and not one day,” he explained. As for Q2 GAAP operating margin, the analyst expects the figure to come in at 1.8%, which would reflect a year-over-year decline of 300 basis points thanks to COVID-related costs and higher fulfilment and shipping expenses.
Additionally, Mahaney is eagerly waiting to see if its AWS segment has been a “structural winner from this crisis.” For this area of the business, he is calling for significant revenue growth of 33% year-over-year. When it comes to ad revenues, the analyst stated, “AMZN’s Ad revenue platform proved to be the most resilient in the March quarter, and we will be looking to see if it is true for the June quarter as well.”
It should also be noted that a majority of consumers said the COVID-19 crisis increased their willingness to purchase online versus in-store, according to an RBC survey. Add to this the fact that “eBay’s intra-quarter announcement suggests that eCommerce continued to see a material demand surge”, and Mahaney thinks AMZN is positioned for success.
Mahaney does point out that there’s still plenty of uncertainty going forward, so there is a broader range of H2 outcomes than is typical. However, all of the above make him optimistic about the giant’s long-term growth prospects.
To this end, Mahaney maintained an Outperform rating and $3,300 price target. Should the target be met, a twelve-month gain of 11% could be in store.
Few disagree with Mahaney’s take on Amazon. Out of 39 total reviews published in the last three months, 36 analysts rated the stock a Buy, while 2 said Hold and only 1 said Sell. So, AMZN gets a Strong Buy consensus rating. Given the $2,991.34 average price target, the upside potential comes in at 1%. (See Amazon stock analysis on TipRanks)
After an extended period of outsized gains, it appears the Amazon (AMZN) rally is pausing for a breather. This week, Amazon shares have ended each session in the red.
However, ahead of Amazon’s 2Q earnings next week (Thursday, July 23), Stifel analyst Scott Devitt suggests investors pull the trigger on the e-commerce giant’s stock, as the 5-star analyst expects the rally to resume shortly.
Devitt rates AMZN a Buy along with a $3,300 price target, implying there’s gas in the tank for another 11.5% of gains. (To watch Devitt’s track record, click here)
It’s unlikely Amazon shares will remain in a downtrend for long. With coronavirus cases on the rise again, Amazon will probably reap the rewards from another period of people staying in, whether by choice or due to enforced shelter in place measures.
This is a point picked up by Devitt, who said, “Amazon stands as a primary beneficiary of the shift in consumer shopping behavior stemming from the pandemic. The slower than previously expected re-opening of the economy is positive for Amazon’s competitive positioning versus traditional retail and increases the likelihood recent changes in consumer behavior are permanent.”
Looking ahead to next week’s report, Devitt expects Amazon to report 2Q20 revenue of $80.9 billion, a year-over-year increase of 28% which is in line with the high end of Amazon’s guidance ($75.0 billion -$81.0 billion) and mirrors the Street’s expectations.
Amazon’s attempts to keep up with demand and ensure workers’ safety during the pandemic has resulted in a $4 billion outlay in Q2. Therefore, Devitt expects the extra money spent to have an impact on operating income, which Devitt estimates will be $955 million and is lower than the Street’s call for $1.18 billion.
Mostly, however, the analyst expects focus to home in on Amazon’s outlook for Q3 and how much it intends to spend to support the higher demand and ensure a safe working environment.
“The outlook for 3Q margin may potentially be weaker than current expectations as investment may impact near-term cost structure,” Devitt concluded.
Out on the Street, Amazon remains as popular as ever. 1 Sell and 2 Holds are soundly beaten by 37 Buy calls, all adding up to a Strong Buy consensus rating. That said, following Amazon’s continued surge, there’s only 1.5% of upside left, according to the $2,991.34 average price target. (See Amazon stock analysis on TipRanks)
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