The FAANG group of stocks, made up of the five U.S. technology giants of Facebook, Amazon, Apple, Netflix and Google (Alphabet) have had a volatile ride of late. The group’s combined value tripled between 2015 and the mid-point of last year before losing around a third of their value over the second half of the year. They have recovered to an extent so far this year, gaining around 25% since the beginning of January.
Slowing growth rates and generally more negative market sentiment was behind last year’s correction for the FAANGs. But following recent gains, what are the prospects of a full recovery and the potential of the tech giants to surpass previous highs? Should those investing online be tempted again? We take an individual look at the five FAANGs.
The social media giant has suffered from a series of blows to its reputation over the past couple of years. Misuse of personal user data and accusations the platform has been used to effectively disseminate misinformation, or ‘fake news’ as it has become popularly known, have been at the centre of the scandals.
However, the negative press that Facebook has suffered hasn’t impacted the company’s profits, which set a new record high over the last quarter of 2018. Analysts believe earnings will see further growth of around a third on current levels over the next three years. This should, despite increasing expenses around data security and efforts to combat fake news expected to erode profits to an extent, mean plenty of room for further positive share price growth.
Until a recovery of sorts this year it was pretty much all downhill for the share price of Apple after the iPhone maker become the first company in history to pass a valuation threshold of $1 trillion last summer. Slowing sales in China and users elsewhere updating their handsets to the latest model have led to numerous ‘peak iPhone’ headlines over the last few months. With the latest models starting at around £1000 or $999 in the USA, there have also been fears the company has pushed the envelope on pricing a little too far, despite an initial positive impact on profit margins.
Apple’s revenues and profits over 2019 are expected to be roughly the same as over 2018 despite revenue from services such as Apple Pay, Apple Music and the App Store and iCloud are still growing quickly. The growth outlook for the company is unclear without a big new product to help share the earnings load with the iPhone, making it hard to predict a lot of space for strong fundamental-based share price growth in the immediate future.
If Apple hitting a $1 trillion valuation last looks as though it might have represented a peak, Amazon, which also passed the milestone and then dropped back below it during the late 2018 sell-off, has more obvious prospects for further sustained growth. With its quickly growing cloud services unit AWS and move into bricks-and-mortar groceries, the Amazon Prime content streaming service and new ecommerce verticals such as pharmaceuticals, Amazon’s current and future revenue is far more diversified than most of the other FAANGs. And crucially still looks like offering plenty of room for future growth.
The current Amazon valuation might seem high at a multiple of 82 times earnings compared to the Wall Street average of 21. However, analysts’ forecasts for growth in earnings over the next few years would reduce that to just 19 times earnings by 2023, on the current share price, suggesting plenty of opportunity for strong share price growth.
If Amazon’s multiple gives pause for thought, that of Netflix is even more extreme at a valuation to earnings ratio of 130 based on 2018 revenues. However, it is based on soaring revenues which have grown 300% in three years. The company’s content streaming service leads a market which is genuinely disrupting how we consume film and television. There is also still plenty of room for subscriber growth, especially in big new markets such as India and Brazil where Netflix is only just getting started.
The short term risk is big investments into proprietary content not paying off but as global connectivity grows, opening up more new markets for Netflix, the smallest of the FAANGs is also at a much earlier stage of maturity, and growth, than the others. This could represent an opportunity for investors.
New verticals are key to Alphabet maintaining growth rates that will both support its current valuation and future share price growth. Through Google, Alphabet is the ‘gatekeeper’ to large swathes of the internet, with a powerful near monopoly of the search engine market across much of the Western world. By far its biggest revenue generator is still digital advertising through Google Adwords and on Youtube, which came in at $32.6 billion last year.
There is still room for growth though. In the shorter term the ambition is to develop the existing Youtube platform into a content streaming rival to Netflix and Amazon Prime. The Google Cloud, cloud hosting service that competes with Amazon’s AWS and Microsoft’s Azure is also a quickly growing revenue vertical. Longer term, Waymo, Alphabet’s autonomous vehicles operating system, which is currently setting the pace for the new sector which is set to be hugely lucrative, is a serious prospect that could take the company onto another level.
The biggest risk posed to investors in Alphabet is that new regulation hits its near monopoly on the search engine market.
Last year’s big equities and bigger tech sector correction certainly represented a significant buying opportunity with regards to the FAANGs. But the current recovery doesn’t mean the opportunity has been entirely lost. While Apple’s future growth opportunities might be less clear cut than for the other FAANGs, it also wouldn’t be the first time if the company pulls a rabbit out of its hat with a new hit product at some point over the next few years. Amazon and Alphabet both look to be developing promising new revenue verticals.
Netflix has plenty of room for growth still remaining for its subscriber base. Facebook might seem currently over reliant on digital advertising revenue and has no obvious revenue generator in the pipeline that would be big enough to mean all of its eggs are not in one basket. But for now at least that basket looks pretty robust and is still growing at strong pace. It has time to find ways to diversify.
The investment case for the FAANGs certainly didn’t end over the 2018 autumn and winter of discontent. The big tech companies are all heavily invested in the next waves of new technology and business models. At least some of them will turn into new, large and sustainable verticals revenue verticals.
History shows us that not all of the companies currently dominant will succeed in evolving well enough to retain their market leading position. One or two of the FAANGs may slip over the next decade as slowing growth leads investors to value them differently even if their currently successful verticals remain cash cows. Another couple will probably also make today’s valuations look like having represented a significant bargain.