In my Real Money column Thursday I mentioned the possibility of earnings-related meltdowns among the FAANG stocks (except Netflix (NFLX) , which has already reported strong earnings). That's really true of any stock in any quarter, though. Investors expect volatility to increase into earnings reports, a fact that is readily observable by looking at implied volatilities on front-month call and put options for companies that are due to report earnings.
So, why is this quarter any different? Interest rates.
I was looking at a 30-year chart of the 2-year U.S. Treasury bill Friday morning and was absolutely gobsmacked by the results. The yield on the 2-year hit 2.91%, which is certainly relevant for short-term traders. In the longer view, though, it's not the fact that we are still at historically low levels of interest rates, it is that spikes in the 2-year have preceded every recession in that 30-year period. Every one.
Maybe Amazon really was peaking when it closed above $2,000 per share for a few days in early September and we just didn't realize it at the time. I am not betting against Jeff Bezos, never have actually, but you have to understand that with a viable alternative to stocks having emerged -- short-term, risk-free U.S. government paper -- up, up, up is no longer guaranteed.
So, watch the key metrics for the bellwether stocks. This FAANG rally has been driven by ubiquity. For instance, who doesn't use Google? Do you know anyone that hasn't purchased something from Amazon in the past three months? Do these people still exist? The number of users matters more than any other metric for each of these companies, even if that is measured in different ways.
So, let's look at user growth, and, always, focus more on the guidance for the next quarter -- and beyond -- and less on the results from a quarter that will already be ancient history by the time Amazon and Alphabet report on the evening of the 25th.
In the second quarter Facebook reported daily active users (DAUs) across its platforms of 1.471 billion and a monthly active user (MAU) count of 2.234 billion. Has #DeleteFacebook had a lasting impact on the user base for the core Facebook.com product? Also, both DAUs and MAUs were flat sequentially in 2Q18 in North America, and the market will want to see a return to growth in FB's home region, which drives advertising spend.
In the second quarter Apple posted a mere 1% year-on-year gain in iPhone shipments. The market will want to see more rapid growth in the September quarter versus the FQ42017 figure of 46.7 million units shipped, but more importantly strong guidance for the seasonally strongest December quarter. Last week, Goldman Sachs cut its estimate for that period to 80 million shipments, part of a downbeat note on Apple, so the bar has been lowered slightly.
Amazon's figures are not as easily parsed as the other tech giants, especially since the company does not report -- except anecdotally -- Prime membership totals. To get at that metric, I focus on Amazon's reported revenue for subscription services, which totaled $3.4 billion in the June quarter, a 57% year-on-year increase.
I'd like to see a figure of at least $4 billion for the September quarter to show that "stickiness reigns" and that Amazon's projected year-on year revenue growth of 23%-31% for the quarter (I'm assuming they'll beat that easily as has been their pattern) is composed of repeat users.
Paid clicks on Google properties rose 58% year-on-year and 15% sequentially in the second quarter. That said, cost-per-click declined 10% sequentially and 22% year-on-year in that period.
For the third quarter I am looking for an improvement in monetization metrics. If that is not is apparent the market will likely reach the conclusion that margins in the core Google search business have already peaked.
That would paint the picture of a lumbering giant rather than a nimble tech outfit using profits from Google search to incubate future technologies such as self-driving cars.