Category: Stock Market

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The FAANG stocks – Facebook, Amazon.com, Inc (NASDAQ: AMZN), Apple, Netflix, and Google parent Alphabet Inc (NASDAQ:GOOGL)(NASDAQ: GOOG) – have now all reported second-quarter 2020 earnings. One fact is abundantly clear: A new era dominated by these tech giants is here, and it isn’t going away anytime soon.

Barring the advice to just buy them all, which is the better buy right now?

Amazon is a standout winner that – even valued at over $1.5 trillion – continues to find new ways to separate itself from the pack. The pandemic is driving a surge in e-commerce demand. Meanwhile, it could be argued that Google is the biggest loser compared to its tech titan peers, posting its first-ever quarterly revenue decline. Right at the moment, it’s easy to argue Amazon is by far the better buy, but a few items bear consideration first. 

All-out growth versus incredibly high profit margins

Amazon and Google will both benefit from long-term secular growth trends: Amazon from the migration to online retail (shockingly, the latest Census Bureau numbers imply less than 20% of retail purchasing happens online in the U.S.), and Google from the switch to internet advertising (half of ads were digital in 2019 for the first time, and the percentage is expected to keep rising).

But with COVID-19 rapidly reshaping the global economy, e-commerce is the winning investment theme of the moment. Amazon’s overall revenue surged 40% in Q2 2020 to $88.9 billion, driven by 43% growth in North American sales, slightly offset by a gain of “only” 38% internationally and a 29% gain for the Amazon Web Services (AWS) cloud computing platform. Meanwhile, Alphabet revenues fell 2% from a year ago to $38.3 billion, with Google, YouTube, and partner ad sales falling 9%, offset by Google Cloud’s 43% advance (as it slowly narrows the gap with AWS) and “other” revenue (YouTube subscriptions, Play app store, hardware, etc.) increasing 26%.

Thanks to Amazon’s top-line momentum, its stock is up 72% this year to Alphabet’s 10% gain. Amazon predicted 24% to 33% growth in the third quarter, with no outlook provided by Google. Clearly Amazon wins the momentum stock challenge, but the amount of cash a company can hang onto is also important.

The bulk of Amazon’s sales comes from retail and related services, and operating profit margins are far lower here than in other areas of the tech world. Total operating profit in the quarter was $5.84 billion (good for an operating margin of 6.6%), with $3.36 billion of that coming from AWS alone. Google, on the other hand, posted an operating profit of $6.38 billion (a 17% operating margin). Granted, both of these figures factor in the large sums of money Amazon and Google spend on disruptive investments to foster future growth and innovation. Still, when using free cash flow (revenue minus only cash operating and capital expense outflows), Amazon’s $19.4 billion over the last 12 months is far smaller than Google’s $31.2 billion.

In terms of valuation, that makes Alphabet stock something almost resembling a value — at least for a high tech name. Based on the current market cap of $1 trillion, Alphabet trades for 32.1 times trailing 12 month free cash flow to Amazon’s 81.5. The relative value on Google counts for something.  

Don’t ignore the war chest

What does free cash flow matter? It’s the sum of cash that gets added to (or subtracted from) the balance sheet at the end of each quarter. And it matters a great deal, especially in the next decade as big tech gets bigger and needs to find new projects to keep growth going. 

At the end of Q2, Google had $120 billion in cash and marketable investments on its balance sheet, and a paltry sum of debt at just $4.55 billion. Amazon is no slouch here with $55.0 billion in cash and marketable securities, but long-term debt of $23.4 billion. Google’s war chest wins, against Amazon or any other mega-tech name out there.

Put another way, Google is one of the most deep-pocketed organizations on the planet and its lead is growing. That too counts for something when deciding which stock is a buy. For now, Amazon looks like the better buy of the moment, with e-commerce expanding at a torrid pace and the company carrying the torch of world-shaping disruption. But over the long term, don’t for a second write off Google.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• 3 ways to play the skyrocketing tech shares
• Better Buy: Netflix vs. Amazon
• Why Amazon’s share price is set to leap on the opening bell
• Meet the ASX stocks that are about to get a boost from Facebook and Google
• US tech shares deliver massive results – what does it mean for ASX tech shares?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Apple, and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Amazon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The August profit reporting season is described by some as the worst ever for the ASX, but this may not be true for at least one sector.

This sector is the only one that UBS is predicting can deliver earnings per share (EPS) growth for FY20.

If you guess mining, you’d be wrong. While Rio Tinto Limited (ASX: RIO) posted a decent result last week, its interim EPS fell 3%!

The only ASX sector growing profits

The mining-beating sector is discretionary retail even though this sounds counter intuitive. Retailers tend to be among the hardest hit in recessionary environments, just like during the GFC.

But this downturn that’s triggered by COVID-19 is different from any other we’ve encountered in living memory.

The pandemic brought about a change in consumer behaviour, while government stimulus provided an extra tailwind. UBS is tipping the sector will post a 5.9% increase in EPS for the year.

Recent guidance shines light

The recent trading updates from JB Hi-Fi Limited (ASX: JBH) and Kogan.com Ltd (ASX: KGN) are only but two examples of retailers growing sales and earnings.

However, this doesn’t mean the best opportunities are in the consumer discretionary sector. If anything, the fiscal cliff (when government support is tapered or withdrawn in October) poses a risk to the sector.

While many retailers will post decent FY20 profit results, their outlook for the next 12 months may not support their stellar share price run, in my view.

ASX stocks that can beat expectations

If you are looking for upside surprises during the reporting season, you probably will need to look elsewhere, and UBS highlighted a few to watch.

Among the S&P/ASX 200 Index (Index:^AXJO) miners, the BHP Group Ltd (ASX:BHP) share price, Alumina Limited (ASX: AWC) and South32 Ltd (ASX: S32) share price could jump as UBS thinks they could deliver better than expected results.

Others in the top 200 benchmark that the broker believes can beat expectations this month include the AMCOR PLC/IDR UNRESTR (ASX: AMC) share price and RESMED/IDR UNRESTR (ASX: RMD) share price.

Better than expected outlook

Meanwhile, the larger cap stocks that could please investors with their outlooks are Amcor, Goodman Group (ASX: GMG) and Charter Hall Group (ASX: CHC).

At the smaller end of the market, UBS is optimistic about the Breville Group Ltd (ASX: BRG) share price and Nextdc Ltd (ASX: NXT) share price. The broker believes both will please on their results and outlook statements.

More reading

• Should you buy ASX gold shares or FAANG stocks in August?
• ASX 200 jumps 2% higher, Afterpay soars
• 3 high quality blue chip ASX 200 shares to buy
• 4 things you need to know about the RBA’s rate decision today
• 2 ASX tech shares to buy and hold beyond 2026

Brendon Lau owns shares of BHP Billiton Limited, Breville Group Ltd, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Amcor Limited. The Motley Fool Australia has recommended Kogan.com ltd and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Both FAANG stocks and ASX gold shares have outperformed in 2020. But which one is better for investors chasing strong capital gains?

Should I buy FAANG stocks?

I think your views on the August earnings season will largely make the decision for you here.

If you’re bullish on the tech sector to continue its gains, then FAANG stocks seem like an obvious answer. While you can’t buy these shares directly on the ASX, there are some exchange-traded funds (ETFs) on the ASX that provide exposure to FAANG stocks.

One option is ETFS FANG+ ETF (ASX: FANG) which has concentrated positions in a handful of United States and China-based tech companies.

The other option is to buy a broad-market, US ETF like BetaShares NASDAQ 100 ETF (ASX: NDQ). FAANG stocks make up a huge proportion of the US market which means this ETF could be an easy way to tilt your portfolio towards US tech.

What about ASX gold shares?

There’s no doubt ASX gold shares have been a good buy this year.

The Saracen Mineral Holdings Limited (ASX: SAR) share price is up 83.1% as gold prices have surged.

That’s despite a 2.4% drop yesterday in this ASX gold share as investors priced in the new Victorian lockdown restrictions and economic impacts.

The St Barbara Ltd (ASX: SBM) share price is up 26.0% in 2020 while Northern Star Resources Ltd (ASX: NST) shares have climbed 39.8%.

Of course, those that bought in the March bear market have done well. However, if we see more market volatility in the months ahead, ASX gold shares could climb even higher.

This month sees many top ASX companies report their full-year or half-year earnings. That means investors will be watching closely to get a gauge on the health of the Aussie economy right now.

If you think we’re in for more short to medium-term pain, ASX gold shares could be a good way to hedge against further drops in the S&P/ASX 200 Index (ASX: XJO).

Foolish takeaway

There are no guarantees in investing. But naturally, we expect to see some good, long-term returns for taking on investing risks.

Both FAANG stocks and ASX gold shares have performed well this year. Right now, no one knows which one will outperform by the end of 2020 or beyond.

However, I think the August earnings season that’s kicking off this week and next may provide us with a pretty good indication.

More reading

• This is the only ASX sector tipped to report earnings growth this reporting season
• 3 high quality blue chip ASX 200 shares to buy
• I don’t normally buy ETFs, but I would invest in these 2
• 4 things you need to know about the RBA’s rate decision today
• 3 ways to play the skyrocketing tech shares

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BETANASDAQ ETF UNITS. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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