Not All FANGs Are Equal

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Includes: AAPL, AMZN, FB, GOOG, GOOGL, MSFT, NFLX
by: Strubel Investment Management

Summary

Referring to FANG stocks as one entity and seeing them as moving together is problematic.

There is a huge dispersion in valuation and growth rates among the six FANG stocks.

The stocks are at different points in their life cycle and serve different end markets.

Each stock should be analyzed separately, not traded as a group.

Referring to the group of fast growing tech companies as if they are one monolithic entity that moves together is problematic. The media, even the financial press, tends to group the companies together and talk about them as if they are all the same. Other than, the fact that all the stocks have done well in recent years there is not very much that is similar among them. In fact, the differences are huge.

Wide Dispersion in Valuations and Expectations

There is a wide dispersion in valuations, expectations, and growth rates amongst the FANG stocks. Note, that for this article we are going to include Apple (AAPL) and Microsoft (MSFT) in our analysis as well since they are sometimes included in the “FANG” stocks although the acronyms would need to be changed.

(Source: Morningstar.com, author’s calculations)

The group of stocks currently trades with a forward P/E ranging from a low of 14.8 for Apple to a high of 123.5 for Netflix. If we adjust for net cash, which is probably reasonable given many of the companies hold huge hordes of cash, the P/Es range from 12.3 to 123.5. In addition, it’s worth noting that Netflix is not free cash flow positive while the other five companies are.

The valuations also are linked to differing growth rates. Estimates for sales growth for next year range from a low of 4.5% for Apple to a high of approximately 25% for both Netflix and Facebook (although in light of the most recent conference call this is likely subject to change).

Different Life Cycles

The various FANG companies are also at different points in their life cycle.

Company (Ticker)

Date Founded

Start of Current Business Model

Facebook (FB)

2004

2004

Amazon (AMZN)

1994

~2005 Prime, AWS, and fulfillment services all start around this time

Netflix (NFLX)

1997

2007 (streaming service debut)

Alphabet (GOOGL)

1998

1998

Apple (AAPL)

1976

2007 (iPhone debut)

Microsoft (MSFT)

1975

2010 (Azure debut)

Microsoft and Apple are senior citizens who found a new lease on life by moving into cloud services and consumer electronics respectively. Amazon is the next oldest but it didn’t really look like the Amazon of today until around 2005 when it started its Prime membership program, fulfillment by Amazon service, and AWS. Alphabet is probably technically the oldest of the bunch since its business model has remained pretty much constant since its founding in 1998. Netflix started around the same time but it’s streaming services is only about a decade old. Facebook is the newest company, founded in 2004.

While enterprise software and consumer electronics are businesses models with long histories and relatively easily modeled, companies like Facebook and Netflix are entirely different. There never has been a company like Netflix before. We don’t know what the ultimate economics of the streaming business model will look like. Same with Facebook, there’s never been a global, profitable social media business. We don’t know what the ultimate margins will look like or even how durable the business model will be.

Different End Markets

There is also a wide variety in how each FANG company earns revenue.

Company (Ticker)

End Market/Revenue Source

Facebook (FB)

Corporate - advertising

Amazon (AMZN)

Consumer spending for e-commerce, Corporate for cloud services

Netflix (NFLX)

Consumer spending on services

Alphabet (GOOGL)

Corporate - advertising

Apple (AAPL)

Consumer spending on electronics

Microsoft (MSFT)

Mainly corporate, but consumer products/services as well

Companies like Alphabet and Facebook depend on advertising revenue, primarily from corporations for their revenue. Netflix and Apple primarily earn their income from direct sales of services and products to consumers. Amazon and Microsoft are a mix. Amazon has a substantial retail business, serving primarily consumers. But, the bulk of its net income currently comes from its AWS business that primarily serves corporate customers. Microsoft’s revenue primarily comes from cloud services and enterprise software sales but it also is earns revenue from consumers via the PC market (via Windows and Office) and it’s video game unit.

Summary

Given the big differences between all of the FANG or FAANGM stocks it doesn’t make sense to refer to them as one monolithic entity. The fact that Facebook might not have the long-term operating margins analysts thought doesn’t have any effect on Alphabet or Microsoft or any other FANG stock. Each of the stocks is unique both in business model, life cycle, and valuation. Long term investors shouldn’t be overly concerned when results at one FANG stock spur stock market fluctuations for others.

Disclosure: I am/we are long amzn, fb, msft, googl.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Note we hold Amazon and Facebook only at approximately their market weight in the S&P 500 index.