For investors trying to make sense of the huge decline in Facebook shares and where the social media giant — and the rest of the FANG stocks — go from here, there is a simple and compelling way to think about it: a major fault line has been exposed in the market's dominant stocks, and it has been a make-or-break issue this earnings season.
At the risk of oversimplification, it is better to be a seller of the cloud than a major user of it. At least right now it is better to be selling the cloud to businesses than relying on cloud to offer services to the hordes of consumers needed to keep growth metrics moving up.
With both Facebook and Netflix taking a hit on earnings, it is important to remember that the growth metrics for these two tech leaders are focused on signing up more consumers — in Facebook's case it is users, and in the case of Netflix it is subscribers. Facebook fell short on users in its most profitable market, North America. Netflix, already saturating the U.S. market, fell short on adding international subscribers.
But Alphabet and Microsoft, focused on getting more businesses and profit from enterprise cloud services, received a positive response from investors after reporting. FANG always has been a mix of consumer discretionary and actual technology, and the actual tech part is more important right now to short-term investor confidence.
In fact, analysts looking for ways to wrap their heads around the Facebook disappointment and look ahead to the next big thing asked a revealing question on the Wednesday conference call:
Given the massive data center investments the company has made, are there ways to improve the return on investment of those investments, "perhaps service third-parties to maybe just improve those returns in the way that other tech and internet companies have in terms of investments in infrastructure?"
Mark Zuckerberg dismissed the idea: "I mean, the quick answer is that we're not planning on going in to the cloud services. We're not planning on doing that. We have to build out all this capacity to serve our community. It's a very computationally and resource-intensive set of services that we provide, and we need to build that out."
Alphabet CEO Sundar Pichai, on the other hand, talked up the cloud growth its earnings called and said rather than seeing it as a zero sum competition right now, there is business growth for all the major players still to come.
Daniel Ives, chief strategy officer and head of technology research at GBH Insights, said this divide between secular trends within the FANG group of stocks — the cloud trend on one side and the consumer trend on the other — is key right now to understanding tech stocks.
Ives said Netflix has owned streaming in the U.S. market, but the miss on international subscriber growth was the culprit for softer earnings and guidance. Facebook's highly profitable North America growth has been stagnant and disappointing.
"With FB and NFLX, their sweet spot, their DNA has been growth domestically and looking to expand internationally. ... When you look on the enterprise side, it is a unique secular trend. We're staring at a fork-in-the-road situation," Ives said.
He added: "The enterprise guys and cloud players have a much easier time, as well as competitive dynamics that are benefiting the clear winners, whereas on the consumer side it is becoming a much more crowded, competitive landscape and some of the traditional sweet spots have backfired from a growth perspective for FB and NFLX."
Netflix was less of a "worrywart" quarter relative to Facebook, Ives said. To be clear, Facebook has many company-specific concerns — the Cambridge Analytica hangover and widespread privacy concerns and Newsfeed issues still unresolved after the election. "It is one of most difficult periods in its 14-year history," Ives said. The secular challenges on the consumer side of tech have been highlighted by the guidance that blindsided Wall Street.
But there also is the more general question about what is the next big driver, even with Instagram "white hot," Ives said. He said it makes sense that Zuckerberg dismissed the idea of getting into the cloud services game, as that is not in its core DNA. But it still leaves the question of what new growth drivers the company can unlock.
"It's almost been a tale of two cities in terms of earnings and how stocks react, trying to discern the consumer business vs. the enterprise," Ives said. GBH estimates that current workloads worldwide are already 30 percent to 35 percent cloud or hybrid cloud, and that will reach 55 percent over the next three to five years. "It is one of the more unique and transformational growth opportunities we've seen in tech in the last 20 years."
It is not news that the cloud is booming, but this FANG earnings season has so far revealed it to be on one side of a major fault line, at least in the short-term outlook from tech investors. And all of these tech stocks have been priced for perfection, with tech valuations and returns dominating the market's recent run. Ives maintained a buy rating on both Netflix and Facebook after their earnings disappointments.
Amazon encompasses both of these big FANG themes.
"Everyone is bullish on Amazon going into the earnings. The Uber driver is bullish. So expectations have gone up, and it is a high bar. ... It is gonna really be a key barometer," Ives said.
Amazon has the enterprise trend in its favor, with its AWS unit being "massive," but on the consumer side investors will be keying in on Prime memberships with growth in competition from Walmart and others.
"This is not just a key earnings for AMZN, but just for tech, to delineate some of trends in consumer and enterprise," the analyst said.
After the bell on Thursday, Amazon reported a revenue miss, but earnings that were double Street expectations. The cloud unit had more than $6 billion in sales, growing by 49 percent, and more than $1.6 billion in operating income. Overall net income jumped to $2.5 billion, from last year's $197 million. AWS operating income of $1.64 billion was above the $1.47 billion FactSet consensus, and 55 percent of all of Amazon's operating income.