FAANG shares rightly dominate the earnings season.
It is noteworthy that, despite their size, they typically see a sharp increase in sales and show pricing power. And that was true in the fourth quarter and all of last year, even during the pandemic.
The FAANG shares are Facebook Inc.
and Google holding company Alphabet Inc.
Their combined market capitalization is $ 6.1 trillion, which is a weight of 18% in the SPDR S&P 500 ETF
and a weight of 33% in the Invesco QQQ Trust
who track the S&P 500 index
and the Nasdaq-100 index
But the FAANG acronym seems a bit long. Microsoft Corp.
The market capitalization is 1.8 trillion US dollars, which is second only to Apple among the S&P 500. So the following tables contain Microsoft together with the FAANGs.
All of these companies reported their results for the fourth calendar quarter. All have fiscal years that correspond to the calendar year, with the exception of Apple, whose fiscal year ends in September. So the following figures all relate to the three months up to December.
Sales and gross margin
If you left FAANG Group in the same order, followed by Microsoft, here are growth numbers for fourth quarter revenue and revenue per share year over year, as well as a comparison of gross margins for both periods:
The sales figures per share are included in addition to the raw sales because the figures per share indicate an increase or decrease in the number of shares. If sales per share are growing faster than sales, it means that the average number of shares has decreased. Share buybacks have outweighed issuing new shares to raise money (unlikely for this group) or scooping new shares to executives as part of compensation packages. An increasing number of shares means that the ownership structure of shareholders is being diluted. This lowers earnings per share and can affect returns if it persists over long periods of time.
A company's gross margin is sales minus the cost of goods sold divided by sales. It doesn't reflect overhead costs, but does take into account discounts, coupons, commissions, or other selling expenses. If a company's sales are growing but gross margins are shrinking, it can be a sign that competition is becoming increasingly difficult. If the gross margin grows as sales increase, it is a good sign of demand for products and services. Any quarter or pandemic can cause gross margin shifts, but it's still a useful trend to follow.
All of the above sales results are fantastic. Gross margins may have gone both ways, but they also show the benefit of certain business models. Facebook's gross margin is very impressive, even if it has decreased a bit. Microsoft's gross margin rose, and this high number reflects the success of its continued move toward subscription distribution.
The following operating margins are earnings before interest, taxes, depreciation and amortization (EBITDA) divided by sales. Most investors know that one-time items can greatly skew GAAP earnings per share numbers. The operating margins provide a measure of the result of a company's core business.
Operating margins have been expanded for everyone but Amazon.
Of course, a company like Amazon can expand for years by using the money it generates to expand its current business or for entirely new industries. This should keep profits and operating margins low. As you can see here, investors have benefited significantly from CEO Jeff Bezos' long-term strategy.
EPS and net profit margins
A company's net profit margin is its profit divided by sales. In a market where revenue growth (or subscriber growth) is valued, earnings per share may be one of the least important numbers for any earnings season. Not only has the EPS been hit by a myriad of one-off items, the entire Wall Street apparatus is geared toward quarterly “winning hits” to make positive headlines. Even if a company's overall business is in decline and profits and sales are falling, it is very likely that EPS and sales will be reported in excess of analysts' consensus estimate.
Below are comparisons of the Group's quarterly results and net profit margins:
Net profit margins rose for everyone except Netflix.
Free cash flow
The free cash flow is the remaining cash flow after planned investments. It's money that can be used for any business purpose, including expansion, share buybacks, or dividends. It is incredibly important for the FAANGs and Microsoft to drive the development of new products and services.
Here are comparisons of quarterly free cash flow per share for the group:
A lot goes into a cash flow statement, and be sure to check out the earnings publications for Amazon and Alphabet for more information.
For Netflix, the big news was the company's management's prospect that free cash flow is around the corner and will be "sustainably positive" going forward.