Market Insights

The most important part of earnings season is about to begin as major technology stocks like Tesla, Microsoft and Facebook present their numbers.

TSLA and MSFT get the ball rolling Thursday afternoon. FB, Amazon.com (AMZN), Apple (AAPL) and Alphabet (GOOGL) follow next week. These six companies have a combined market cap of $6.7 trillion — almost one-quarter the entire value of the S&P 500 index.

They all hit new highs this month. Some, like AMZN and MSFT, have directly benefited from the pandemic. Others, like AAPL and TSLA, were already riding strong trends and seem largely immune to coronavirus. Finally, a weak economy and low interest rates have made big growth stocks more attractive than companies like financials and industrials.

Let’s review some of the key things to know as the results flow in the next few weeks.

Tesla Earnings

TSLA has been rallying since CEO Elon Musk fixed manufacturing problems in late 2019. The electric-car maker started July with a decisive breakout above $1,000 as investors looked for its plants to resume production after coronavirus shutdowns.

They’re also looking for operations to begin soon at TSLA’s new Model Y plant in Shanghai. China’s already a huge market for the Palo Alto, California-based company.

Traders may wonder why TSLA is up so sharply (about 400 percent) since October, when the broader Nasdaq-100 has only gained about 40 percent. One reason is “operating leverage”: As sales increase and economies of scale take effect, profit margins tend to widen.

TSLA also moved like this before, pricing in years of future growth in a few quarters. Between April 2013 and February 2014, for example, it shot from $40 to $250. The shares then paused for the next five years.

Another big story is potential inclusion in the S&P 500, which requires four consecutive quarters with positive net income. TSLA is expected to meet that bar this week.

Finally, TSLA has benefited from an influx of capital into “ESG” funds, focusing on Environmental, Social and Governance issues.

Trading Options on FANG Stocks

As many readers may know, the market views some of these large technology companies under the so-called “FANG” umbrella. The club traditionally included FB, AMZN, Netflix (NFLX) and GOOGL. It’s since widened to other major Nasdaq-listed stocks like TSLA, AAPL, Shopify (SHOP), Nvidia (NVDA) and Advanced Micro Devices (AMD).

Most FANG stocks trade at least 100,000 option contracts per session, which can make it easier to leverage their moves. Say, for example, an investor thinks AMZN will rally to $3,500 after its earnings report on Thursday, July 30.

He or she could buy the 31-July 3,400 calls for about $90 and sell a matching number of 31-July 3,500 calls for $67. The position, known as a vertical call spread, have a net cost of about $23.

Say CEO Jeff Bezos comes through with strong results and AMZN jumps to $3,500, the spread could expand to $100. That would be a profit of more than 300 percent from the shares rising less than 10 percent. If it doesn’t rally, the entire position would probably expire worthless.

Microsoft Earnings

MSFT is the other big name Thursday afternoon. Analysts at firms including RBC, Baird, Mizuho, Jefferies, Barclays and Raymond James have issued bullish notes on the software giant in the last week. They’re noting strong orders for services like Azure and margin expansion (more operating leverage). Some also see a boost from the xCloud video-game platform later this year.

Next week brings FB, AAPL, AMZN and GOOGL.

FB reported better-than-expected earnings on April 29. It broke to new highs on May 20 after announcing the Facebook Shops small-business service. The social-media giant then struggled with an advertiser boycott, resulting in the smallest gain of the major tech stocks. (FB is up just 4 percent in the last month, less than half the move of the Nasdaq-100.)

AAPL’s earnings could matter less than its transformation into a provider of services. Bulls also see a potential boost from a 5G iPhone later in the year.

FANG+ Earnings Timeline

Here’s a timeline of some key tech stocks issuing results this week and next: