Is the bubble going to burst for FAANG, let’s find out?

The biggest tech companies of the world, also referred to as FAANG [Facebook (now Meta), Apple, Amazon, Netflix and Google (now Alphabet] had a strong rally till the start of the new year when the statements from the Fed about interest rate hikes put the brakes on the dream run of these companies.

January witnessed a sell-off in these companies as investors moved away from such expensively valued companies to bond markets and other safer bets.

However, as earnings started pouring in, investors started flocking towards these tech giants again, lured by the robust results and strong guidance given by the companies.

Barring Facebook, which had a dismal showing when it announced its results on February 2, and which caused the stock to tank 26 percent on the NASDAQ, the other four companies returned consensus-beating numbers, which again fuelled the rally in their stocks.

The strength of the rally can be gauged from the fact that, before the fall of Facebook, almost $1 trillion was added by the FAANG stocks, over six days, with the pack surging 10 percent.

Also read: Meta, formerly Facebook, faces historic drop as stock tanks

“Facebook Meta market value dropped about $240 billion (Rs 18 lakh crore) in a day. That is more than the total value of India’s largest company. It highlights the fragility and fickleness of our times. Welcome to the never normal world!”, tweeted Uday Kotak, Managing Director of Kotak Mahindra Bank.

Experts say that lower-than-expected results from Facebook is just an aberration and does not reflect the true picture of the broader strength depicted by the overall tech sector.

To be sure, Facebook dampened investor sentiments, with disappointing earnings for the quarter, gave weak guidance and said user growth has stagnated.

Also read: Meta's big plunge examined, Facebook parent company loses $230 billion market value in a single day

Facebook’s earnings per share (EPS) came at $3.67 versus the consensus estimates of $3.84. Its reported revenues of $33.67 billion met expectations but it missed out on user numbers as well.

Its daily active users (DAU), at 1.93 billion, were down, compared to analysts’ estimates of 1.95 billion, marking its first quarterly decline in DAUs on record. Monthly active users were also reported far below estimates—2.91 billion versus the estimates of 2.95 billion.

Its average revenue per user (ARPU), however, improved slightly at $ 11.57, compared to the estimates of $11.38.

Facebook had said that a combination of factors impacted its performance, including privacy changes to Apple’s iOS and macroeconomic challenges.

The high inflation and supply-chain issues squeezed advertisers’ budget, which resulted in lower-than-expected growth.

It issued disappointing guidance for the first quarter as it said revenue in the first quarter will be $27-$29 billion, while analysts were expecting sales of $30.15 billion. That would mean a 3-11 percent year-on-year (YoY) growth.

Facebook’s peers continued their splendid performance and gave robust guidance for the coming quarter. This instilled confidence in investors and they were rewarded in a fitting manner by the markets.

Alphabet (parent of Google) reported better-than-expected earnings and revenue for the fourth quarter. It reported a revenue growth of 32 percent, again bucking the pressure from the pandemic and inflation.

Google’s advertising revenue came in at $61.24 billion for the quarter, up 33 percent from $46.2 billion in the same period a year ago.

The company’s cloud business witnessed a 45 percent growth in revenues, at $5.54 billion. Operating loss for the business stood at $890 million during the quarter, which was lower from the $1.14 billion loss a year ago. The loss was higher, compared to the previous quarter, when the unit lost $644 million.

YouTube ad revenues, at $8.63 billion, were the only metric that fell short of analysts’ expectations of $8.87 billion.

Traffic Acquisition Costs (TAC), which indicate how much the company pays other websites to acquire traffic, came in higher at $13.43 billion, compared to the estimates of $12.84 billion.

Alphabet’s backlog increased more than 70 percent to $51 billion, primarily consisting of the cloud business, Alphabet CEO Sundar Pichai said on the earnings call. He added that the company saw 65 percent YoY growth in the number of cloud deals worth over $1 billion.

The mobile phone giant, Apple, reported its largest quarterly revenue ever, with sales growing over 11 percent. This was despite supply challenges and the lingering effects of the pandemic.

The company exceeded sales estimates in every product category, except iPads, which witnessed a YoY decline of 14 percent in its revenues at $7.25 billion.

Its overall revenues came in at $123.9 billion, compared to the consensus estimate of $118.66 billion. Iphone revenues, at $71.63 billion, were higher by 9 percent on year while services revenues were up 24 percent year on year at $19.52 billion.

Revenues from other products were up 13 percent on year, at $14.7 billion, and revenues for the Mac business increased 25 percent over last year to $10.85 billion.

Consequently, Apple’s gross margins improved to 43.8 percent, compared to the estimated 41.7 percent.

“What we expect for the March quarter is a solid YoY revenue growth,” Apple CEO Tim Cook had said. “And we expect supply constraints in the March quarter to be less than they were in the December quarter.”

The world’s largest e-commerce player, Amazon, also exceeded expectations when it reported results on February 3. The revenue in the fourth quarter grew by 9.4 percent on year to $137.4 billon, which, ironically, is its first quarter of single-digit growth since 2017. The company was aided by a gain of $12 billion on its investment in electric vehicle company Rivian.

Even though sales numbers and guidance for the first quarter were disappointing, Amazon gave investors enough confidence that growth will recover.

Its revenues from advertising services grew 32 percent YoY to $9.7 billion during the quarter. The company’s cloud computing business performed exceptionally well as the revenue at Amazon Web Services rose almost 40 percent to $17.78 billion, beating analysts’ estimates.

Amazon has guided first-quarter revenue to be between $112 billion and $117 billion, below the average estimate of $120 billion.

Streaming giant Netflix kick-started the results seasons for FAANG companies on a disappointing note, with slowing subscriber growth due to increased competition from other companies.

“Consumers have always had many choices when it comes to their entertainment time - competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering,” Netflix had said.

The company had added 8.28 million paid net subscribers globally in the fourth quarter, which was higher than the estimated 8.19 million. However, this is below the 8.5 million subscribers that were added in Q42020, the same figure it had forecast for Q42021, and its outlook for the coming quarters was worse.

The company said for the first quarter of 2022, it expects to add 2.5 million subscribers, compared to the 3.98 million it added a year ago.

It posted revenues of $7.71 billion and met consensus estimates.

In the aftermath of Facebook’s financial debacle, investors might be questioning the growth opportunities in the technology sector. But before arriving at any meaningful conclusion, it is important to understand the fact that all these tech giants operate in a different segment, have unique business models and have grown significantly, despite facing unique macro and micro economic challenges.

A slight blip here and there, owing to specific causes, will always remain but if long-term fundamentals are strong, and if there is always going to be a demand for the company’s business, investors need not worry about the long-term growth of any company.

Barring Facebook and Netflix, to a certain extent, other giants have delivered confidence-boosting earnings, which shows their businesses are on a sound footing to face the challenges of macroeconomic environment.