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FAAMG Stocks Hog the Limelight on Super Thursday: 2 Must Buys

Several tech mega caps are poised to report quarterly results on ‘Super Thursday’. Despite being near record highs, computer and software companies remain trusted choices for traders. This fails to surprise as Trump administration’s initiative to trim tax rates is providing the much-needed windfall to such companies that have mostly hoarded money outside the United States.

Let us, thus, focus on the quarterly results of FAAMG shares — a Wall Street acronym for Facebook Inc FB, Apple Inc. AAPL, Amazon.com, Inc. AMZN, Microsoft Corporation MSFT and Google’s parent company Alphabet Inc GOOGL, which are mostly responsible for the stellar performance of tech stocks this year.

While Alphabet, Microsoft and Amazon’s results will be out on Oct 26, Facebook and Apple’s earnings releases are slated for next week.

Tech Investors Gear Up for Earnings on ‘Super Thursday’

Tech stocks are already trading at record highs, with Amazon, in particular, having touched the $1000-a-share level this year. Banking behemoth Bank of America Corp BAC  added that the world fund manager’s survey for October noted that “long Nasdaq”, the tech-heavy stock index, is the most popular trade for the fifth time this year.

The Nasdaq 100 index, in fact, has rallied around 25% on a year-to-date basis, having hit a record high last week. Also, its price-to-earnings ratio is at the highest level since the dotcom bubble. The S&P 500 tech sector’s forward price-to-earnings ratio climbed to 18.9 from 16.2 at the beginning of this year.

So, are the valuations too rosy? It’s possible that traders are gathering Internet and tech companies on the prospect of upbeat Q3 earnings. Tech companies’ earnings for the said quarter are expected to be up 9.7% on 6.7% higher revenues. Also, 30 days into the start of the Q3 earnings season, the tech sector has gained an average 4.6% in the last 19 years, way higher than the S&P 500 index’s gain of 2.3%, as per hedge fund analytics tool Kensho.

Notably, Q3 earnings are expected to garner strength on Trump’s promises to deliver historic tax reliefs.  Trump’s intentions to lower the U.S. tax code will help tech stocks bring back cash held overseas to the United States. Tech stocks have stashed around $2.4 trillion overseas which could be used for buying back shares, paying dividends and clearing debts.

Needless to say, growth in cloud computing and Internet of Things, artificial intelligence, gaming and the launches of increasingly complex smartphones and consumer electronics suggests that the good times for techs are here to stay.

Banking on such bullish trends, money managers are keeping an eye on the FAAMG shares that helped tech come a long way from the dot-com fiasco. After all, the tech sector has surged 31% so far this year, comfortably beating healthcare, the next best performer.

FAAMG Stocks’ Earnings Preview

Shares of Alphabet, Microsoft and Amazon have recorded gains of 25% to 30% so far this year. When Alphabet reports its Q3 results, a steady uptick in traffic acquisition cost will be a concern for investors. After all, the cost was up 28% in Q2, more than the 23% increase in revenues from Google sites. Among other bottlenecks, rise in capital outlays and regulatory pressure building in Europe might impede its shares’ upward trajectory.

But, there are positive developments like robust growth in mobile search and YouTube advertising, which may provide momentum on the revenue front. Higher investment spending, in the meanwhile, is likely to boost earnings per share (read more: 3 Key Estimates for Google's Q3 Earnings Report).

Microsoft’s fiscal first-quarter earnings are dependent on its cloud business as its Azure and Office 365 services continue to gain momentum. Commercial cloud revenues are expected to rise by as much as 51% to $4.9 billion for the tech company in the quarter, as per Credit Suisse Group AG CS).

Microsoft also, successfully, countered the declining PC market banking on its new Surface Pro. With stability in the cloud and Windows business, Morgan Stanley MS believes that Microsoft’s revenues will spring back to double-digit growth next year for the first time since 2014 (read more: 3 Key Estimates for Microsoft's Q1 Earnings Report).

Both Alphabet and Microsoft have a Zacks Rank #3 (Hold). Meanwhile, the world's most customer-centric company, Amazon has a Zacks Rank #4 (Sell). Shares of Amazon declined nearly 7% from the preceding quarter as the company’s profits were hampered by increased investments in areas ranging from film production to warehouses.

The e-commerce giant is expected to double down on its investments before the holiday season, which may eventually affect its bottom line in Q3 (read more: Amazon’s Q3 Earnings to be Hurt by Heavy Investments).

2 Solid Buys

Investors, in fact, should raise their bets on Facebook and Apple. Facebook, in particular, is expected to score big in Q3, courtesy of an increase in ad revenues. A Citigroup Inc C research showed that the Internet giant will see a 47% year-over-year increase in ad revenues in Q3. If that happens, the company will be able to beat analysts’ predictions again.

Facebook’s mobile and live video efforts continue to pay off, with Instagram emerging as an important revenue stream. Apart from mobile and video, the monetization opportunities of the company’s other subsidiaries – Messenger, WhatsApp and Oculus – coupled with a huge user base are expected to drive growth. Facebook is also experimenting with AR/VR and AI technologies, which bodes well for long-term growth.

Currently, the company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings advanced 2.1% over the last 60 days. It is expected to report earnings for the quarter ending September on Nov 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Facebook’s expected growth rate for the current year is 26.5%, higher than the industry’s estimated growth of 14.8%. The company has outperformed the Internet services market on a year-to-date basis (+48.3% vs +25%).

Coming to Apple, management expects growth in iPhone revenues in the fiscal fourth quarter. The world’s most valuable publicly-traded company’s enriched product portfolio, which now includes Watch 3 and 4K TV, will also help its shares gain momentum. The company’s $1-billion investment for acquiring original content and its plan to foray into the film distribution market will boost revenues further.

Right now, the company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings increased 1.6% in the last 90 days. It is expected to report its latest quarterly earnings on Nov 2.

Apple’s growth rate for the current year is projected to rise 8.4%, higher than the industry’s estimated growth of 2.1%. The company has outperformed the computers & mini computers market on a year-to-date basis (+35.1% vs +34.6%).

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