The End Of FAANG?

|
Includes: AAPL, AMZN, FB, GOOG, GOOGL, NFLX
by: Wall Street Wizard

Summary

FAANG stocks recently reported earnings, with some up and some down.

Some FAANG stocks are maturing towards slower, more steady growth.

Other FAANG stocks look poised to continue to outperform.

Fueled by Trump Tax Cuts, the 2018 2Q earnings have largely all been exceeding market expectations. Overall, the S&P 500 is seeing 22.4 percent earnings growth and 8.6 percent revenue growth. 70% of S&P 500 companies are also beating EPS estimates while 73% beat sales estimates. The tax cuts are estimated to have added nearly 7-8 percentage point increase to earnings.

Meanwhile, the stocks that make up the technology index that Jim Cramer created, otherwise known as 'FAANG,' (Facebook (FB), Alphabet/Google (NASDAQ:GOOG) (GOOGL), Amazon (AMZN), Netflix (NFLX), and Apple (AAPL)) have somewhat stumbled recently. Firstly, Netflix whiffed on subscriber growth in 2Q. In the US, Netflix was estimated to add 1.19 Million Subscribers during the quarter. However, Netflix only managed nearly half of that estimate, at 670,000. This sent the stock plunging nearly 19%.

Facebook also stumbled a bit, revealing a slight slowdown in Daily Average Users (DAU). DAU came in at 1.47 billion, from 1.49 billion estimated. Revenue also came in slightly lower than expected.

Meanwhile, Apple and Alphabet reported stellar earnings. Amazon also reported good earnings as well.

This, thus, has inflamed the question: Is this the end of FAANG?

Source: The Fortune Teller

In short, yes and no.

Yes, as a whole, the FAANG 'fad' is over.

Tech stocks have had remarkable returns during this 9-year-old bull market. In 2017 alone, FAANG stocks returned an average of 50%, over the S&P 500 return of 19%. However, moving forward, I think we can see with the divergence of earnings that each member of the FAANG index will move independently from here. Some will continue to see explosive growth, others, being more mature, will see slower growth.

Specifically, Apple will grow more slowly. At this point in its maturity, Apple has transitioned from a high-growth tech stock into almost a consumer staple and discretionary stock. Barring any revolutionary product, Apple's growth will rely on the more moderate growth of the iPhone, the Apple ecosystem, the Apple Watch, etc. Don't discount Apple, however, as they continue to grow revenue and earnings. In 3Q 2018, Apple crushed its $52.31 billion revenue and $2.18 EPS estimate with $2.34 actual EPS and a revenue of $53.3 billion. Critics may denounce Apple earnings, but I will remind you that this was a 17% year-over-year growth from the previous quarter. Bottom line: it is still a cash making machine and will see more growth ahead, but the days of explosive growth are over. That is unless it can invent another iPhone.

Facebook may have stumbled a bit, but this was largely due to context. Analysts flipped over the Earnings Call, in which CFO David Wehner indicated lower growth in revenue and users in the future. However, Facebook posted a higher than expected EPS of $1.74 and 41% increase in sales from the same point last year.

Of course, user growth will slow at some point. There are a finite number of humans in the U.S. and around the world. But Facebook's growth is still solid. And it has many avenues to continue growth: dating, TV, monetizing Instagram and WhatsApp, etc. Nevertheless, Wehner's comments were more preparatory and guiding than actual.

Like Apple, Facebook will continue to see growth. Perhaps not explosive, but good, solid growth.

I should also note that I consider the correction in Facebook a great buying opportunity.

Netflix is perfectly set up for continued stumbles. A great company, but overvalued, premised on perfect growth. Like it already experienced in Q2, this is unlikely to occur without misstep as there are less subscribers, costs of content creation increase and more competitors are entering the media space (AT&T (NYSE:T), Disney (NYSE:DIS), Walmart (NYSE:WMT)). I haven't even mentioned Hulu and Amazon, also juggernauts in the space. Yes, Netflix is still growing, but growth is decelerating. Revenue growth will decelerate from 38% to 25% in 2019. And it's valued currently, at a staggering 144 P/E. It is growing, but perhaps only into its mature valuation.

No, these FAANG stocks aren't dead yet.

Whereas Apple, Facebook, and Netflix are seeing growth slow, Amazon and Alphabet are still full steam ahead.

As usual, Amazon blew the earnings estimates out of the water. It posted an EPS of $5.02, from $2.49 expected. With 39% year over year revenue growth, Amazon is still growing explosively. It also continues to expand into new spaces, such as Healthcare. Whether growth will continue at this rate is anyone's guess. Personally, I love the company, but simply am not comfortable with the +200 P/E valuation.

Alphabet perhaps faces the brightest future. Earnings yet again crushed estimates. EPS grew to $11.75 from the $9.59 analysts expected. Revenue also grew to $32.66 billion, nearly half a billion more than analysts estimated. All segments, including Ad Revenue and experimental businesses, reported great growth.

In contrast, Alphabet has perhaps the most resilient product of all FAANG companies. Alphabet's ad revenue is less driven by users than Facebook. The company is also fantastically diversified, with Maps, Search, Gmail, Chrome, YouTube, Android, etc. It's 'Other Bets' also feature great potential in Waymo, which is the most advanced driverless car technology.

With a 33 P/E ratio and explosive growth, Alphabet is poised to continue outperforming the S&P 500.

Thus, I also have to conclude that the growth in FAANG stocks is not yet over. Alphabet faces great prospects for growth. While Amazon must contend with its valuation, it does not yet indicate any slowing growth.

In Conclusion

At this point, I think the future of FAANG stocks will diverge. Some-like Apple, Facebook, and Netflix will see steady, solid growth in their maturation. Others-like Amazon, and particularly Google will in all likelihood see great future growth.

How I am Playing It

Seeing the future, I am most excited for and putting the majority of my funds into Alphabet. I consider it to have the largest runway for growth - especially as Waymo and other businesses emerge. I am a buyer at almost any level right now, as the P/E of 33 is very reasonable.

That said, the correction in Facebook in alluring for me. Never thought I would see value in growth stocks - seeing as the recent correction brought the P/E down to 2017 levels, while earnings demonstrated continued growth. Thus, I have sold other stocks in order to buy more into Facebook. The value investor in me considers $160-180 too good of an opportunity.

As for Apple, I see it as Warren Buffett does now: nearly a consumer staple. I will happily buy more, but perhaps not yet at the current price. While I am elated that Apple became the first $1 Trillion company, it is leaning towards the overbought side. However, I will buy at any downside in the near future.

Amazon and Netflix do not do enough for me. They are both wildly overvalued. And I really think Netflix's best days are done. The risk/reward just isn't there.

How about you? What are your thoughts on the recent FAANG earnings and their future?

Disclosure: I am/we are long FB.

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.