How to play the FAANGs ahead of earnings

Key Points
  • Four of the five FAANGs — Facebook, Amazon, Alphabet and Apple — are set to report earnings in the next week.
  • Don't worry about Facebook's $5 billion fine from the FTC, says Josh Brown of Ritholtz Wealth Management. It's just "a tax, a cost of doing business."
  • Amazon is leading the way in making acquisitions and announcing initiatives that "make it more ubiquitous in everybody's lives" without incurring as much governmental wrath, says Steve Weiss of Short Hills Capital Partners.
  • The traders are split on Apple: Weiss thinks the stock goes down short-term on disappointing earnings, while Brown says it won't break out but advises you to "be patient" with it. 
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The next week will be big for earnings as four of the five FAANGs — Facebook, Amazon, Alphabet and Apple — report.

Facebook, which goes first on Wednesday after the bell, has faced a slew of bad news over recent weeks. The FTC's $5 billion fine against the company over the 2018 Cambridge Analytica privacy scandal is the largest it has ever imposed on a tech company.

Josh Brown of Ritholtz Wealth Management thinks this is the main story going into earnings season. On Monday's "Halftime Report," he said his big question is "how bad do we think the next round of fines and/or regulations will be?"

But fines on the company may not hurt the stock. Brown compares them to "a tax, a cost of doing business." Steve Weiss of Short Hills Capital Partners agrees, "The markets ignored" the FTC's announcement. "The $5 billion was in line with expectations… They will get fined again by the EU. It's a fact of life when you're such a dominant company."

Calling Facebook his favorite FAANG stock going into earnings, Jon Najarian, co-founder of Najarian Family Office, also praises its acquisitions strategy: after integrating WhatsApp and Instagram more fully into the main organization, "now Mark Zuckerberg and Sheryl Sandberg are monetizing those — and if they go after gaming too, with 2.5 billion people on those platforms, I think that's just another win for them."

In the long-term, will calls for increasing regulation and possibly breaking up Facebook get in the way of this acquisition strategy? Weiss is skeptical. "There's no mechanism to really split them up… The market just ignores that, as they should."

Even in the unlikely outcome that it does get split up, Brown predicts Facebook's value could rise because it would focus more on the core product — as PayPal and eBay were able to do. "If the worst thing you can say about Facebook is more regulation and they might get split up because of politicians, bring it."

Analysts estimate $1.88 in EPS on $16.5 billion in revenue for Facebook in the second quarter according to Factset.

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When it comes to acquisitions strategy, Amazon is the "model" to follow, argues Weiss. "Despite being under the focus and magnifying glass of the president and Congress, they keep going out and making acquisitions and keep announcing new initiatives which will make them more ubiquitous in everybody's lives."   According to Factset, analysts are expecting $5.57 in EPS and $62.50 billion in revenue for Amazon in second quarter, which reports on Thursday.

Even Apple may be turning to acquisitions. It is reportedly now in advanced talks to buy Intel's smartphone modem chip business, which is valued at more than $1 billion. The deal would be an investment in 5G technology, which could be the key to increasing the company's growth as iPhone sales continue to slow.

Before the news broke, Weiss was already predicting that "5G will drive a major upgrade cycle… Until then, it's going to weaken because who's going to buy a new phone in front of 5G?" His plays in the 5G space are Skyworks, a chipmaker that manufactures for the iPhone, and SMH, the semiconductor ETF.

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Other traders agree it will be harder for Apple to find new customers. But Najarian, whose biggest position is in this stock, is betting that the company's shift into services will create recurring revenue from existing users — especially in the cloud space. He points out, for example, that most of Apple's billion or so iPhone users already use the company's cloud products.

Brown agrees the upgrade cycle is key: "If you're in Apple because you think they're going to have a 30% growth in their user base, you're going to be disappointed. The story here is that anyone who can afford an iPhone uses an iPhone. And when their iPhone is 18 months old, they go get another one. As long as that continues, and I don't see why it wouldn't, it's a big enough business that you don't need them to find another 5 billion people."

In the short-term, the traders are only cautiously optimistic on the stock. Weiss owns it but also owns short-term puts because he foresees a disappointing results. "There's too much expectation for too many good things in the quarter. So I'm betting the stock will trade down. I don't want to give [up] my core position because I don't want to pay taxes."

Brown's advice is similar: "Be patient with the company." He doesn't think the news will be good enough for Apple to break out much higher — but he's in it for the long term. "I don't need it to be the best performer in my portfolio… It's got feast years, it's got famine years. At the end of the day, it's not expensive. I don't think you're taking a huge risk owning it."

Apple will report next Tuesday after the closing bell.  Factset estimates $2.09 in EPS and revenues of $53.31 billion in the fiscal third quarter.

As for the remaining FAANG, Alphabet's turn is on Thursday. Analysts are expecting EPS of $11.10 and $38.15 billion in revenue in the second quarter according to Factset.

Disclosure: Josh Brown owns shares of Apple, Amazon and Alphabet. Steve Weiss owns shares of Apple, Amazon, Alphabet, Skyworks Solutions Inc and Vaneck Vectors/Semiconductor ETF; he also owns puts in Apple. Jon Najarian owns shares in Apple and Facebook; he also owns calls in Facebook.

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