It appears Alphabet’s Google (GOOGL) has been recently caught in the crosshairs of broad-based weakness in the tech sector, but analysts generally remain bullish about the firm’s long-term performance.
The FANG index (NYFANG), which comprises Facebook (FB), Amazon (AMZN), Netflix (NFLX) and GOOGL, has been dragged down by precipitous falls in some of those constituents’ shares.
To date, FB’s and NFLX’s shares have plunged around 21.35% and a little more than 20%, respectively, from their highs set in July 2018, after concerns surfaced about the companies’ growth potentials following the release of their second quarter earnings.
FB, for example, disappointed analysts’ expectations on both revenues and global daily active user numbers, while suffering from compliance issues and data privacy scandals. On the back of these headwinds, the social media giant warned that its top-line growth would likely falter in the second half of 2018, with declines poised to fall within the high single-digits. Meanwhile, NFLX also spooked investors with roughly one million fewer subscribers than the market anticipated.
Contagion and Bearish Island Reversal Concerns
Against this backdrop, it’s not surprising that some analysts would start to fear the spread of contagion to other names in the FANG basket.
AMZN has felt a sting, with its shares declining over 4.5% from their late July high to around US$1,780, and overall, NYFANG has fallen nearly 10.25% from its high set in late June 2018 to US$2,734 in premarket trading Tuesday.
The market has also viewed GOOG’s stock with a modicum of concern recently, after a potential bearish island reversal candlestick pattern began to appear. The firm’s shares had gapped higher above US$1,215 on July 23 to close at US$1,248 July 24, and reached an all-time high of US$1,268 on July 26, before beginning a downtrend.
Furthermore, there has also been an uptick of GOOG put option contracts expiring September 21, 2018 with strikes of US$1,200 and US$1,150, which have spiked since Tuesday, July 24 (post-earnings) – likely resulting from investors putting on a downside spread – according to the IBKR Trader Workstation.
Proper context
However, technicians have generally shrugged-off GOOG’s short-term move, preferring instead to rely on longer-term signals, such as its weekly RSI (Relative Strength Index), Stochastics and MACD (Moving Average Convergence Divergence) momentum indicator – all of which have remained bullish.
Darren Chu, analyst and founder at Singapore-based Tradable Patterns, said there has been “a rotation away from growth stocks into value, hence the relative strength we’ve seen” in the S&P 500 (SPX) compared to the Nasdaq 100 (NDX). However, GOOG’s stock has “held up stronger than other FANG constituents and is only beginning to tire on the weekly RSI, Stochastics and MACD.”
Chu noticed the other FANGs are “more bearish with their down-sloping weekly RSI, Stochastics and MACD,” adding he expects the NDX to continue to be a proxy for the FANGs – given their disproportionate weighting, as well as ease of trading.
Other analysts observed steep falls in GOOG’s shares, to the tune of around 14% in February and then again in March, for example, only to recover each time. The latest dip in the stock has generally been attributed to a normal, healthy correction from the unwinding of a long-term, overbought condition.
Sound fundamentals
Bond investors also appear to remain confident about GOOG’s overall abilities to meet its debt obligations, as the company’s business model continues to prove its fundamental strength.
Alphabet managed to post Q2’18 revenues of US$32.7bn, up 26% year-on-year, and earnings of US$4.54 per share – both surpassing analysts’ expectations. The company achieved these figures despite a US$5bn regulatory fine imposed by the European Commission.
GOOG’s 3.375% February 2024 notes were last quoted about 1bp tighter on the day to 18bps more than matched-maturity U.S. government bonds, and its 5-year credit default swap recently traded roughly flat at around 39bps.
Comments
Log in or sign up to join the conversation.