The Wall Street heavyweights and titans of tech, who are they? FAANG stocks. We’re talking about Facebook, Amazon, Apple, Netflix and Google, the giants that make up over 20% of the S&P 500’s market cap.
Amid the COVID-19 pandemic, these stocks have experienced remarkable rallies, with the run-ups culminating in record highs. What’s behind this surge? Part of it has to do with the fact that the stay-at-home climate has been good for business. Accelerating the shift to online, e-Commerce, streaming and cloud services have been some of the key beneficiaries of the crisis.
However, given this incredible charge forward, do FAANG stocks still have more room to grow? According to J.P. Morgan, some do, with the investment firm’s analysts noting that two out of the five still represent compelling plays.
Bearing this in mind, we used TipRanks’ database to find out if the rest of the Street agrees. As it turns out, other pros are on the same page, as the analyst consensus rates both tickers a “Strong Buy."
It was a blowout quarter for e-Commerce giant Amazon. What does this strong performance mean for the company? It means that it gets a thumbs up from J.P. Morgan.
Looking more closely at the print, the firm’s Doug Anmuth points out the top-line beat was driven by strong prime member engagement. Q2 revenue came in at $88.9 billion, reflecting a 41% year-over-year jump and surpassing the five-star analyst’s expectation by 10%. His estimate was at the high end of guidance.
Expounding on the results, Anmuth stated, “AMZN saw strong demand across the board, especially in grocery & consumables, though other categories including hardlines & softlines ramped through the quarter AMZN’s Prime ecosystem stood out this quarter, as Prime member growth accelerated in the U.S. and international, existing member renewal rates increased, and Prime Video viewing hours doubled year-over-year.” The spotlight also landed on the grocery segment this quarter, with its delivery capacity growing 160% and overall sales tripling year-over-year.
This strong demand is slated to persist in the second half of the year, with management guiding for Q3 revenue of $87-$93 billion, implying 24%-33% year-over-year growth. “We note the deceleration from 41%-plus in Q2 is mostly driven by Prime Day moving into Q4 (ex-India), which we estimate has a ~$3 billion-plus impact,” Anmuth noted.
Even though AMZN’s COVID-19 costs exceeded $4 billion, its operating income flew past guidance, with its international business turning positive on an operating income basis for the first time. This was fueled by robust demand in more developed markets, specifically in the UK. Anmuth added, “AMZN also benefited from the normalization of essentials / discretionary mix through the quarter and less marketing spend.”
To further support his bullish stance, Anmuth cites the expanding AWS backlog, accelerating IT migration plans, increasing network square footage and Prime Day. Weighing in on the latter, Anmuth commented, “While AMZN is still working to improve 1 and 2-day shipping times, Prime Day moving to Q4 this year should help smooth demand during its busiest quarter and help avoid warehouse capacity issues around the holidays. We also believe the shift in Prime Day could cause revenue to reaccelerate in Q4, though we don’t model it.”
All of the above makes AMZN a “Top Idea” on J.P. Morgan’s Focus List. As a result, Anmuth continues to assign an Overweight rating and $4,050 price target to the stock. Should his thesis play out, a potential twelve-month gain of 28.5% could be in the cards. (To watch Anmuth’s track record, click here)
For the most part, other analysts don’t beg to differ. Out of 39 total reviews published in the last three months, 38 analysts rated the stock a Buy while only 1 said Hold. Therefore, AMZN is a Strong Buy. Meanwhile, the $3,725.59 average price target implies shares could surge 18% in the coming year. (See Amazon stock analysis on TipRanks)
Scoring the other spot on our list, Alphabet, the parent company of Google, didn’t deliver as strong of a showing as Amazon did in the second quarter. That being said, if you ask J.P. Morgan, big things are in store for the company going forward.
Writing for the firm, analyst Doug Anmuth, who also covers AMZN, notes that GOOGL’s Q2 print was largely in line with expectations. Overall gross revenue was flat year-over-year, but this was better than the analyst’s -2% call, driven primarily by strength in Google Play and YouTube subscriptions. As for advertising, YouTube ads revenue beat Anmuth’s estimate, while Search & Other were in line and Network was below.
Most important for Anmuth, however, was that “Search & Other got back to flat year-over-year exiting June and further improved modestly in July as search activity returned to more commercial topics and advertisers increased spend.” He added, “Search has recovered faster than we expected, and we now project 4% FXN year-over-year growth in Q3, up from our prior -4%.”
The implication? Anmuth explained, “Overall, we are positive around Search durability & Google Other upside. YouTube Ads and Google Cloud growth felt a bit soft, but we believe these two businesses will continue to benefit from shift to digital, and we look for bigger upside over time.”
It should be noted that management believes lower office space investments will cause 2020 headcount growth to moderate from 20% in 2019 and 2020 capex to decline year-over-year. Even though headcount and capex growth moderations support margins, Anmuth highlights the fact that management’s commentary on margins and cost discipline was “less constructive than at Q1.” Having said that, “there is room for margins to stabilize as newer businesses become more mature and GOOGL continues to gain efficiencies,” in Anmuth’s opinion.
Representing another positive, so far in 2020, GOOGL has bought back $15 billion-worth of stock, compared to $18 billion in 2019. With a new authorization also announced, the company should have enough runway to continue buying shares at or above current levels. Anmuth said, “We note GOOGL has made more shareholder friendly changes this year than we had expected, including better disclosure and stronger pace of buyback, and we believe there is room for further improvement.”
Everything that GOOGL has going for it convinced Anmuth to stay with the bulls. To this end, the analyst reiterated an Overweight (i.e. Buy) rating and left the $1,770 price target as is. This target suggests shares could rise 13% in the year ahead.
Looking at the consensus breakdown, other analysts have also been impressed. Based on 30 Buys and 2 Holds, the word on the Street is that GOOGL is a Strong Buy. At $1,739.19, the average price target implies 15% upside potential from current levels. (See Alphabet stock-price forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.