One day we will look back and realize that we had that chance….
We will look back and realize which of the major growth companies have reinvented themselves. But that’s sometime in the future. For now, we are in the process of figuring out what the recent price drops are all about.
Sometimes the most obvious opportunities are the best ones to pursue.
Six stocks (Facebook, Amazon, Netflix, Google, Apple and Microsoft, or FANGAM) have largely driven U.S. equity markets over the past decade. But now, in the midst of all the turmoil of the past few weeks, they have roiled the market with their latest earnings reports… to no one’s surprise.
Netflix and Facebook saw declines of 20% and more in market capitalization, following negative earnings reports. Over the decade, the collective market capitalization of FANGAM stocks increased from $719 billion to $5.07 trillion, and their share of the total value of all U.S. stocks also rose from 6.5% to 14.9%.
Well, these past weeks have been interesting…
Facebook and Netflix stumbled in their latest earnings announcements, dropping more than a fifth of their market capitalization. For both companies, user numbers were the basis for the negative surprises. Facebook reported a quarter-to-quarter decline in user numbers for the first time as a publicly traded company, and Netflix reported disappointing subscriber growth.
In short-term trading, where pricing is driven by sentiment and momentum, earnings reports and news releases are scrutinized for incremental news, information that can significantly affect prices.
This explains the focus on earnings expectations per share and why seemingly minor surprises, where a company beats or misses earnings expectations by a few cents, can cause a company’s market capitalization to rise or fall significantly.
So, what should you do?
Facebook is the most undervalued of the six companies because one reason is that it seems to have lost its story script. For a decade, the story that drove its valuation was a simple one. A platform with billions of users that ran personalized ads.
But the backlash toward stronger privacy protections seems to have finally prompted the company to redefine itself, first by renaming itself Meta and then by adjusting its business model. I consider Facebook to be still a profitable company, with one of the highest operating margins at 40%, but I expect the share price recovery to be halting until it finds a coherent storyline.