Stock Market Comment: Big Tech and coronavirus

• Big Tech companies were drivers of US stock market rally in 2019

• Coronavirus outbreak hits supply chains

• Mass cancellation of tech conferences

• Potential boost to cloud service revenue?

• USFANG fails to break above key moving average

Big Tech companies were drivers of the US stock market rally in 2019. However, developments at the beginning of 2020, especially coronavirus outbreak, have made landscape much more difficult to conduct business on a global scale. In turn, FAANG stocks may find it hard to repeat last year’s results, both in terms of share price and business performance. In this commentary we will focus on impact coronavirus has on operations of FAANG stocks.

In spite of taking a hit during recent market sell-off, most of the US Big Tech companies are trading higher YTD. Facebook and Alphabet saw their share prices drop the most on the coronavirus outbreak. Source: Bloomberg, XTB Research

Coronavirus outbreak in China takes toll on product supply

While FAANG stocks operate in slightly different industries, they share some common traits. Namely, Microsoft, Apple and Facebook suffer from supply chain disruptions due to production halts in China. Apple and Microsoft issued warnings saying that production freeze in China is likely to cause them to miss guidance for the quarter. The situation may be a significant drag on earnings as, for example, major iPhone manufacturers are not expected to return to normal production until end-March. Facebook is a social media company but it also suffers from production halts in China as it sees limited supply of its Virtual Reality headsets. However, it is not a major driver of Facebook’s revenue or earnings therefore it should not have a significant impact on the company's results.

US500 enjoyed a strong recovery at the beginning of this week. However, it looks like fuel for gains is running out and investors are shifting their focus back to coronavirus outbreak. The index broke below the upward trendline today and may be set for a deeper drop. Currently bulls try to halt declines near 38.2% retracement of last week’s downward move. Source: xStation5

Business travels and big conferences cancelled

Another source of concern is mass cancellation of big events. Google cancelled event for app developers while Facebook called-off F8 developer conference. Fate of Apple’s WWDC conference scheduled for June is still uncertain but in case coronavirus is not contained it may be cancelled as well. Some companies, like for example NVIDIA and Microsoft, decided to hold their tech conferences online rather than live. The events are an opportunity for companies to present their new products and services and lack of such conferences may be a setback from a marketing point of view. Apart from that, companies are also banning non-essential business travels.

Facebook managed to halt recent declines at the lower limit of the Overbalance structure, that also coincides with the 38.2% Fibo retracement of the upward move started in late-December 2018 ($186). However, an attempt of breaking back above the 200-session moving average (blue line) failed, signalling the woes may not be over yet. In case declines resume and Facebook (FB.US) breaks below the $186 handle, 50% Fibo ($174) will act as the next support. Source: xStation5

Facebook contractor and Amazon employee test positive for coronavirus

Amazon and Facebook see the biggest disruption risk from the coronavirus after their employees tested positive for the coronavirus. Both cases relate to Seattle offices. Facebook even decided to shut the premise until March 9 in order to limit the spread of the virus. Microsoft did not report a coronavirus case among its employees but is also urging people in the Seattle area to work from home for the next 3 weeks. While working from home is possible for employees of tech companies, it may create some inconvenience as home offices seldom are as well-equipped as company’s premises. However, overall impact from such disruption should not be significant.

Situation of Amazon (AMZN.US) is similar to that of Facebook - share price tested lower limit of market geometry and moved higher. However, Amazon’s recovery has bigger momentum therefore shares may remain in demand. In such a scenario, the level to watch is resistance at $2030. Source: xStation5

Cloud segment to get a boost?

However, some of the discussed companies may see their results boosted by the outbreak, at least in some business units. Microsoft and Amazon may see increased demand for their cloud services. This is because more and more companies consider asking their employees to work from home. In fact, Microsoft is already seeing higher cloud-related orders, at least according to recent reports. Should more countries or companies impose lockdowns, orders may receive a boost. 31% of Microsoft revenue in 2019 came from cloud business while Amazon’s Web Services unit accounted for 12.5% of sales in 2019. 

Conclusion

Summing up, while coronavirus outbreak poses a major threat to the US and global economy, most of the Big Tech companies should not experience major disruptions. Of course, companies like Apple or Microsoft, that have their supply chains going through China, are likely to suffer a negative impact. However, as the spread of the disease eases in China already, production in the country should be slowly returning back to normal. Spread of the virus within Seattle can also deteriorate sentiment as the city is one of the biggest US tech hubs. However, most of the discussed companies should be able to cope with it by asking employees to work from home or shifting them to other locations.

NYSE FANG+ index (USFANG) is in quite an interesting spot. The index made two tests of the 77-period moving average (H4 interval) and recent price action suggests it may be gearing for the third one. Note that this moving average has limited downward moves earlier this year and in 2019 therefore it can be seen as an important resistance. Failure to break above it may doom index to slide back all the way to 3180 pts. Source: xStation5