All Hail

Good news: Amazon, Facebook, and Alphabet aren’t going out of business anytime soon.

All three tech titans reported results that breezed past estimates on Thursday evening in the US. While there’s plenty of scope for the market to find something to dislike in the details, the headline numbers suggest that if a serious de-rating is in the cards for the names that have shouldered much of the burden in a virus-blighted 2020, it won’t be attributable to these quarterly numbers.

And it’s a good thing. Because this market lives and dies by just a handful of companies. Without the FAAMG cohort, the S&P 500 would not be holding up as well as it has under what might fairly be described as some of the most exigent economic circumstances most living humans have ever witnessed.

Facebook reported revenue of $18.69 billion and EPS of $1.80, both of which easily topped estimates and came in better than the most optimistic forecasts. The market was looking for $17.31 billion and $1.39. The shares looked poised to hit a record high in after hours trading. Monthly and daily active users both beat.

Alphabet reported ex-TAC revenue of $31.6 billion, near the top-end of the range and better than the $30.45 billion the market expected, although it did represent the first drop ever. EPS was $10.13, nearly $2 ahead of consensus. Ad sales suffered, as expected, falling more than 8% YoY to the lowest since 2018. Cloud revenue was in line, YouTube ads revenue was a slight beat, operating margins were 200bps better than expected (albeit down on year), and so on and so forth.

Amazon’s net sales beat the highest estimate, coming in at $88.9 billion for the quarter, up 40% YoY. EPS was $10.30, which doesn’t even appear to be comparable to the range. Operating income rose 88% to $5.8 billion. Q3 revenue guidance is $87 billion to $93 billion against market expectations for “just” $86.5 billion. AWS net sales in Q2 were a bit light, but that doesn’t seem like it will matter considering the top-line guidance beat.

The context is crucial. Since the March lows, the pandemic trade has turbocharged tech’s outperformance. In many respects, tech is the pandemic trade. The Nasdaq 100’s ratio to the S&P is perched at dot-com peaks.

A hodgepodge of momentum indicators began flashing overbought signals as the space ran ever higher, before finally stumbling last week.

At one point, the Nasdaq 100 traded at the largest premium to its 100-DMA in at least two decades.

The numbers detailed above point to further gains, barring a post-earnings “sell the news” dynamic on Friday or some manner of surprise on the conference calls.

Oh, and just “one more thing” — Apple.

Revenue obliterated estimates at $59.69 billion, up 11% YoY. Consensus was looking for $52.30 billion and the range was $49.25 billion to $55.84 billion. iPhone revenue was $26.42 billion. I’m no Apple analyst, but that looks to have made a mockery of estimates — consensus saw $21.31 billion. Services revenue was in line. Products revenue of $46.53 billion blew past market expectations for $38.36 billion. Revenue in China was up nearly 2% YoY to $9.33 billion.

Cash and cash equivalents sits at $33.38 billion. EPS of $2.58 was well above the high-end of the range. The market was looking for just $2.07.

The company also announced a 4-for-1 split.

“Apple’s record June quarter was driven by double-digit growth in both Products and Services and growth in each of our geographic segments”, Tim Cook bragged. “In uncertain times, this performance is a testament to the important role our products play in our customers’ lives”.

I’d call that an understatement. And, really, you could say the same thing for the entire lineup that reported on Thursday evening. These companies are frighteningly synonymous not just with the market, but with “life” in general. And their results prove as much.

I’ve spilled gallons (upon gallons) of digital ink in these pages over the last five months documenting the extent to which the pandemic has reinforced many of the trends which already favored a kind of “perpetual motion” rally in mega-cap tech. This is an opportune time to recap via some of the more poignant quotes from that coverage. I’ll present them below, using bullet points, in no particular order.

• In addition to the macro-based investment thesis, widespread fascination with the top five stocks stems at least in part from the world’s childlike obsession with toys, gadgets and the apps that run on them.
• “Scroll hypnosis” is a real thing. If you’re an investor and you want to “own what you know”, everyone “knows” these companies because, increasingly, they are synonymous with life in a way that something like Starbucks or Nike are not. It’s true that you “are what you eat” and that people still identify with brand names. But you are not a white chocolate mocha or a pair of VaporMax in the same way that you are your Instagram or your Twitter handle.
• While the business models of the tech heavyweights aren’t immune to COVID-19, they have a stranglehold on all aspects of digital existence.
• These monopolies permeate nearly every facet of daily life. And for millions upon millions of Americans, digital life is the only kind of existence that’s possible right now.
• Mega-cap tech are the new utilities. It’s simple really. You seek safety in the oligopoly whose businesses pervade nearly every aspect of human existence. The pandemic reinforced the trend towards a digitized, virtual world.
• Nothing – not regulatory worries, not ridiculous multiples, not overt threats from politicians, not privacy breaches – seems capable of short circuiting the perpetual motion machine dynamic driving these names inexorably higher.
• Yes, there’s something profoundly absurd about stretched tech names counting as “defensive”, but remember, that’s the zeitgeist. It’s been that way for quite a while. The pandemic just cemented the case by giving people a health-based excuse to avoid human interaction and further immerse themselves in the digital realm.
• I’ve joked previously about an “infinity rally” in the sector. While it’s possible to posit a number of mildly bearish scenarios, one thing I haven’t heard from anyone, anywhere, is a convincing argument for why investors should abandon the big five en masse. Put differently, there doesn’t seem to be an aggressive bear case for mega-cap tech in a world where the same handful of companies are, in one way or another, embedded in virtually all aspects of social interaction and commerce. It’s an oligopoly over almost every facet of human existence.