It wasn't long ago that investors were placing odds on the first U.S. stock to reach a trillion-dollar market value. Apple won the race, crossing the symbolic mark in early August. Amazon.com followed suit, though its trillion-dollar dalliance lasted less than a day. For most tech stocks, it has been downhill ever since. Now the talk is about a trillion-dollar meltdown. The FAANGs—a basket of high-growth technology companies that includes Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL)—have lost $1.1 trillion since their peaks. This month alone, the loss comes to $400 billion. Each of the FAANGs has sustained drops ranging from 20% to 40%. Among the list of top 10 S&P 500 tech stocks in 2018, Netflix is now the only FAANG to make the cut.
Part of the selloff may have been driven by herd behavior as traders rushed for the exits at once. "It was an unwinding of a really crowded trade, and some investors locked in gains after several years of material outperformance," says Mark Mahaney of RBC Capital Markets, a longtime internet analyst who has covered multiple tech wrecks. "These kind of market drops usually create buying opportunities."
For investors, the selloff is also a chance to step back from the FAANG obsession that has dominated investing since the acronym became popular in 2015. (The original incarnation of FANG didn't include Apple.) While the group of stocks has seemingly moved together since then, the FAANG stocks topped out at different times this summer, speaking to their varied business models and end markets.
For investors, the next opportunity for the FAANGs could come from picking them apart. One of Warren Buffett's maxims is that there are no "called strikes" in the stock market as there are in baseball. Individual investors don't have to swing at everything. They can wait for the best "fat pitch."
Barron's has analyzed the cause of each FAANG's decline and assessed the ongoing uncertainties. For each stock, here's our opinion on whether to swing now—or wait for a better pitch.
Apple — Not yet
Apple is the biggest loser in terms of stock value this month. A 21% decline has erased $240 billion worth of market value, as investors grew worried about deteriorating demand for the latest iPhones. In total, Apple has lost $303 billion since its market value peaked at $1.12 trillion.
Apple's decline accelerated in early November after the company gave disappointing sales guidance for its holiday quarter. That's the last we heard from Apple, but the bad news keeps coming from others. In mid-November, several Apple component suppliers lowered their financial forecasts, hinting at slowing iPhone demand.
Last Monday, The Wall Street Journal reported that Apple has recently cut orders for all three of its newly released iPhone models.
A week ago, Barron's suggested that Apple's slide could continue. The stock is down 11% since then, but our assessment remains about the same: Investors may want to wait until the negative news flow is incorporated in Wall Street models. For now, analyst estimates for iPhone sales have remained stubbornly high. The reset will probably occur by the time Apple reports its holiday quarter in late January or early February.
All isn't lost for Apple investors. One mediocre product cycle doesn't change the company's strong attributes: a bulletproof balance sheet with $123 billion in net cash, its stellar brand, a loyal customer base, and a sticky ecosystem of software and services. During the last disappointing iPhone product cycle—the 6S and 6S Plus—Apple stock fell 32% from peak to trough in 2015 to 2016. That fall has almost played out again. A similar decline would suggest a bottom of $165 for Apple's stock. Apple closed the week at $172.29.
Facebook — Good value
Barron's was bullish on Facebook in late March, when the shares fetched $160 per share in the wake of the Cambridge Analytica data-privacy scandal. After the call, the stock rallied to a new high of $218 in late July.
But then the shares dropped again, sparked by Facebook spending more on security and its review of content. On July 25, the company said its operating margin would fall to the "mid-30s on a percentage basis" over a multiyear period from the 44% it reported in its second quarter. Shares are down nearly 40% since then.
While there are other problematic issues, Barron's still believes that Facebook shares are attractively valued here.
Last month, the company said more than 2.6 billion people use one of Facebook's major services— Facebook, WhatsApp, Instagram, or Messenger—monthly.
"There is going to be a regulatory overhang, and the stock is facing headwinds from selling pressures and market liquidity," says Sarat Sethi, managing partner at Douglas C. Lane & Associates. "But the company has unbelievable, valuable properties in WhatsApp and Instagram that will be monetized."
Netflix — Too many clouds
Netflix's high for the year came shortly before the streaming giant missed second-quarter expectations by more than a million subscribers in mid-July. An ensuing third-quarter beat on earnings and subscriber numbers hasn't been enough to turn the tide, given growing concerns about future profitability. KeyBanc Capital Markets' Andy Hargreaves downgraded the shares on Oct. 16 after being a Netflix bull since 2014. He cited the company's weaker-than-expected forecast for its fourth-quarter "contribution profit"—Netflix's measure of profitability that subtracts costs and marketing expenses from sales.
Last week, Netflix confirmed to Variety that it is testing a lower-cost $4-a-month mobile-only plan in Malaysia and other countries, which could signal that the company is also worried about future growth. Netflix didn't respond to an additional request for comment about its pricing experiments.
The company's year-over-year sales growth decelerated to 34% in the third quarter versus 40% in the prior quarter. Sagging momentum is a problem for a stock priced at sky-high valuations.
Netflix trades at 63 times estimated 2019 earnings. The company has burned through $2.2 billion in cash over its previous four quarters. As of the end of the third quarter, it had long-term debt of $8.3 billion and $18.6 billion of content obligations.
With rising streaming competition coming from Walt Disney (DIS) in late 2019, plus a pricey valuation and debt-laden balance sheet in a rising interest-rate environment, Netflix shares may fit in the "don't swing" category.
Amazon.com — Slowing growth
It hasn't paid to bet against Jeff Bezos. There's a reason he's the world's richest person. But like Netflix, Amazon now has the worrisome combination of a high valuation and a slowing growth rate.
Amazon shares topped out on Sept. 4, but its big decline came on Oct. 26, when the stock fell 8% the day after it reported third-quarter revenue that was $500 million below analysts' expectations. The company's December-quarter sales projection of $66.5 billion to $72.5 billion was also below the $73.8 billion Wall Street consensus forecast. The midpoint of Amazon's forecast would represent year-over-year growth of 15%, down from 29% in the third quarter and 39% in the second quarter.
Perhaps more worrisome is the declining growth of Amazon's core e-commerce business, which drives the traffic and flywheel for all of Amazon's other highly profitable businesses, including cloud computing, its third-party marketplace platform, and advertising. Amazon's "online stores" revenue—the products it directly sells to consumers—grew 11% in the third quarter, down from 22% a year earlier.
With Amazon's valuation fetching a heady 56 times Wall Street's 2019 estimated earnings, it doesn't leave much room for error. Investors should be wary of the stock until growth resumes.
Alphabet — Most attractive bet
The high for Google-parent Alphabet's stock came in late July, soon after it reported better-than-expected second-quarter earnings of $11.75 a share—$2 ahead of estimates. In late October, the company beat expectations again, with earnings of $13.06 per share, versus the $10.41 consensus. Sales grew at 21% in the latest quarter from a year ago.
Despite the two strong quarters, Alphabet has been caught in the crossfire of the tech selloff; its stock is down 20% from its high.
Barron's wrote positively on Alphabet in early April, when the shares traded at $1,010 per share versus $1,030 at Friday's close. All of the bullish arguments, including the company's growth outlook and the value of its franchises, are just as valid today as they were earlier this year.
RBC's Mahaney notes that Alphabet's prospects are still anchored by its dominant search engine, which accounts for more than 80% of earnings, according to his estimates.
"Alphabet has been the most consistent grower of the FAANGs," he says. Even after years of robust growth, Google accounts for only a "small percentage of global advertising spending and will gain material market share over the next five to 10 years." The analyst has an Outperform rating for Alphabet shares and a $1,400 price target.
David Schawel, the chief investment officer of Family Management, notes the shrinking gap in relative valuation between Alphabet and the broad market. The S&P 500 is trading at 15.2 times estimated earnings for the next 12 months, according to FactSet.
Using Schawel's forward estimate, Alphabet fetches just 18.8 times, an insufficient premium to the S&P, he says, given the company's higher growth and its dominant competitive position.
"While it's possible that sentiment on technology stocks remains negative in the near- and medium-term future, we view it as a compelling longer-term holding," Schawel wrote in an email to Barron's.
On top of its core ad business, Alphabet has several early-stage businesses in secular growth markets such as cloud computing and artificial intelligence. The biggest potential upside could come from the company's Waymo subsidiary, which is regarded by many experts as the current leader in autonomous-driving technology.
Earlier this year, Mahaney's firm estimated that the market for autonomous-driving taxis could reach $3.8 trillion by 2050. He told Barron's this week that Waymo should carry an enterprise value of more than $100 billion—a value not reflected in the current stock price, according to his analysis.
To be sure, Alphabet has faced recent hiccups from its handling of executive misconduct, as well as an antitrust ruling from the European Commission that may change the way the company bundles apps with Android. But these issues are fixable and will not significantly impact core earnings power.
Thanks to the long runway for its core business and the call options from its other still-young efforts, Alphabet stands out. It's the FAANG worth swinging for the fences.
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