In January of this year, alarm bells were beginning to sound. Investors were coming off of a stellar 2019, but to some market analysts, there was a fly in the ointment. They warned of a sharp correction in the market.
The warnings weren’t about the strange virus developing in China that we would eventually come to know as SARS-CoV-2, or the novel coronavirus. These warnings were more fundamental. They went to the very substance of “the market” that had returned 28.88% in 2019.
As a few companies grew larger and larger, analysts were concerned that their concentrated impact on the S&P 500 was much too high. By the end of 2019, just five companies made up 18% of the total market cap of the index. Their names should sound very familiar. The companies were Amazon (AMZN), Alphabet (GOOG), Apple (AAPL), Facebook (FB), and Microsoft (MSFT).
Ironically, having many of your eggs in one basket—especially a technology basket, as it turns out—is not a bad strategy in a global pandemic.
A few of my friends, against my advice, have not been opening their latest IRA and 401(k) statements. But, as of now, they may be pleasantly surprised by the next one.
Investors keep asking me how the S&P 500 can be down only 11%, with the Nasdaq 100 actually teetering between slightly positive and slightly negative for the year, while the oil, airline, hotel, restaurant, and industrial industries, along with many other sectors, are in shambles.
Well, while GDP numbers are horrible, job loss numbers are historic, and the loss of life is horrific, it turns out technology is allowing us both to continue doing business, albeit remotely, and to ease the negative impact of social distancing and the feelings of isolation that can arise because of it.
And that ability to facilitate business processes and keep people connected in the current environment is being rewarded. These companies were already large and ubiquitous before COVID-19, and will likely come out of the current crisis even stronger.
Facebook reported earnings last week, and everyone expected a very negative outlook on advertising. With many businesses struggling, advertising is one of the easiest expenses to cut. For example, Google announced recently it would be cutting its own advertising spend in half.
But, after reporting advertising revenue had risen over 18% in Q1 to $17.74 billion year-over-year, FB stock jumped nearly 10%.
While CEO Mark Zuckerberg said he is concerned re-opening the economy prematurely will “almost guarantee future outbreaks and even worse economic outcomes,” he also said the company is seeing advertising begin to stabilize.
More importantly, in looking at the company longer term, Zuckerberg said over 800 million people a day are engaging in Facebook Messenger Rooms (a competitor to Zoom (ZM) meetings), and FB and Instagram livestreams.
As Zuckerberg said, “Because no one is planning physical events right now, live streaming has become the primary venue for many events.”
And, speaking of staying connected, the Apple iPhone has become an even more indispensable business tool as everyone who can, is asked to work from home. iPhones are being used to film TV shows and broadcast NFL draftees jumping for joy, and as lifelines to communicate with seniors isolated in retirement and nursing homes.
I recently saw an interview with a CEO who was working from home like the rest of us when he broke his iPhone. As he said, that would normally be cause for some anxiety, but in the current business circumstances he nearly panicked. He ordered two new iPhones for immediate delivery.
AAPL’s stock is down just 12% from all-time highs reached at the end of January. COVID-19 impacted the company’s supply chain, and delayed the launch of its most recent products. But, if anything, the move to a work-from-home policy at most white-collar workplaces has highlighted the need for 5G, an even faster and more robust network that will drive new phone sales.
AAPL currently trades at a PE of just under 23, and pays a dividend of just over 1%. Revenue in the latest quarter was $58.3 billion, slightly higher than last year’s $58 billion, despite COVID-19. EPS was $2.55, a solid gain over the same quarter last year, which came in at $2.46.
Finally, I’ve written about the rise of Zoom quite a bit recently. And, while it is a big hit for its ease of use, larger corporations have shunned the video meeting software for its lack of proper security. These are issues the company is working through, and I believe will resolve in short order.
In the meantime, Microsoft already has Microsoft Teams, a robust video meeting tool in use by many large corporations. The product can be easily rolled out to corporations already using Microsoft products, such as Office, and has a more robust security feature set.
MSFT was already seeing the benefits of its Office product’s conversion to a software-as-a-service (SaaS) model. And, the work-from-home trend, which may be here to stay for more workers than you might expect, should continue to benefit the company.
In its just-released earnings report, CEO Satya Nadella said the company had seen “two years’ worth of digital transformation in two months.” A statement accompanying the earnings release said the impact on Microsoft revenue from COVID-19 thus far had been “minimal.”
The company reported revenue of $35.0 billion, up 14% quarter-over-quarter, and net income of $10.8 billion. Earnings per share came in at $1.40 for the company’s fiscal Q3.
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