Did you ever think a FAANG stock might be considered a value stock?
They’re not near that level yet, but the group of large-cap technology stocks suffered during the fourth quarter of 2018, and with another year of excellent sales growth expected for most of them, you might be looking at buying opportunities.
Here’s a chart showing total returns for the FAANGs — Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Google holding company Alphabet’s Class C shares (GOOG) — since the end of 2017:
Netflix and Amazon came out well, despite the fourth-quarter pain.
Here are returns since the end of the third quarter:
Yes, they are ugly, but you might return to being a believer in some of the FAANG stocks when you see the consensus sales growth expectations. First, take a look at forward price-to-earnings valuations, based on consensus estimates for the following 12 months, for the group:
Facebook’s forward P/E ratio didn’t decline significantly from the end of September. However, the stock was already down 7% for 2018 through the third quarter, and the consensus earnings per estimate for the company for 2019 has declined 9% to $7.42 a share from $8.15 at the end of September.
Lofty valuations for Netflix and Amazon — paradigm shifters that always trade high to earnings — have declined significantly.
Apple and Alphabet have also seen big declines in forward P/E valuations. Investors weren’t surprised when Apple CEO Tim Cook explained a tremendous cut in the iPhone maker’s sales forecast on Jan. 2; the stock was down 32% during the fourth quarter (with dividends reinvested).
Price targets and 'buy' ratings
Analysts expect double-digit share-price increases for all the FAANG stocks from these reduced levels over the next year:
So a clear majority of sell-side analysts polled by FactSet favor all the FAANG companies except for Apple, for which slightly less than half of analysts have “buy” or equivalent ratings on the shares, with all remaining analysts having neutral ratings for Apple.
You might be wondering how much the price targets have dropped since the end of the third quarter:
Price targets are down for all the FAANGs except Netflix.
Backing up the enthusiasm
For the FAANG companies, investors remain fixated on sales growth. Here’s what analysts expect:
Analysts expect slower economic growth in the U.S. in 2019 in great part because sales and especially earnings received a tremendous boost from the dramatic cut in federal corporate income-tax rates. Sales for S&P 500 (.SPX) companies are expected by analysts to increase by 5.3% in 2019 and again in 2020, slowing from 9.3% in 2018.
Apple stands out, as you can see, with analysts expecting a slight decline in sales this year and marginal improvement during 2020. Then again, it is, by far, the cheapest stock among the FAANGs on a P/E basis. It will be fascinating to see if Cook decides an acquisition would be a good way for the company to deploy its mountain of cash.
Here are analysts’ expectations for earnings per share:
Analysts expect EPS for the S&P 500 to increase 21.8% for 2018, followed by 6.5%in 2019 and 11.1% in 2020.
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