The Street's Jim Cramer coined the term FANG stocks a few years ago and the market has really caught on. What he was referring to was a group of tech stocks – Facebook FB, Amazon AMZN, Netflix NFLX and Alphabet GOOGL (Google in those days) – that showed continued growth potential, so probably worth biting into!
Now that half the year is done, here’s a quick recap of what’s been going on with these companies. First off, a bit on the share prices:
Facebook and Amazon have appreciated, with Facebook up 16.71% YTD and Amazon slower at 5.87%. Alphabet lost 9.57% of its market value, with Netflix losing the most (down 20.01%).
The difference narrows down in June as may be expected, with the stocks declining 3.81%, 0.99%, 6.04% and 10.81%, respectively.
Second, the companies aren’t exactly comparable. Amazon is primarily a retailer (and that increasingly includes video sales). Facebook is a social network (that also serves video). Alphabet has a finger in practically every pie but its primary revenue earner is Google (which also offers video) while Netflix is an online video provider.
So if there’s a common factor at all, it’s video. In this respect, Netflix and Google’s YouTube are the leading providers of downstream video with Amazon growing very fast off a small base, according to the latest numbers from Sandvine.
A quick look at the numbers tells us that the company has a good record of beating estimates. It has done just that in three of the last four quarters. What’s more, the average four-quarter surprise is 133.55%! Okay, investors love this stock too, which is why its PEG is on the high side at 3.08 (industry average is 0.54).
The important thing to remember here is that while Amazon is still classified as a retailer, it is at the moment much more than that. While maintaining its lead in the fast-growing ecommerce retail space, Amazon, through its AWS unit, has become a first-mover in another fast-growing emerging segment, i.e. cloud Infrastructure-as-a-Service (IaaS). The company therefore has multiple growth drivers.
The first-mover advantage in cloud infrastructure is significant because moving infrastructure to the cloud is an expensive process and moving it away to a competitor could be even more expensive. This tends to lock in customers. In addition, Amazon provides attractive discounts that make it impossible to leave. Since retail, especially Amazon-style is a very low-margin business while AWS is much higher-margin, this business lifts profitability for the entire company despite being under 10% of its revenue.
Amazon remains a major innovator on the retail side, where it continues to expand the range of Dash buttons and Echo devices that facilitate purchase from its sites. The recently-announced Amazon phone is an experiment to leverage Prime and thereby generate further sales. It’s also a major innovator on the cloud side, where Microsoft MSFT, with all its might is still a distant second. Amazon continues to expand AWS regions across the world (this business being dollar denominated, is also a good currency hedge).
And here’s the best part: Amazon has a Zacks Rank #2 (Buy); Zacks Growth Score A, Zacks Momentum Score A and a combined VGM score of B. That means the company has solid growth prospects and there is reason to expect further upside to the shares.
Netflix may not be raking in the cash the way Amazon does, which isn’t really all that surprising considering its investments in content and expansion. The company completed its massive expansion drive into 130 new countries in January, so it is now available in 190 countries, i.e. practically everywhere except China. But success in any location is dependent on its ability to provide content that matches local preferences, so this is the current area of investment.
There are three reasons for investor concern related to this stock. The first of these is uncertainty about the period over which content investments will continue and the payback period. Netflix has struggled in some regions like South Korea where it invested in regional content. Netflix India is in the process of creating original content in partnership with Phantom Films. Other original programs it is working on include Lost In Space, Skylanders and ‘The Get Down’.
Investment in content is an important part of the business, and the only way the company can remain competitive. So this isn’t what we should be worried about. What is more important is its ability to recover these costs from subscribers. So the 17 million subscribers that were un-grandfathered in May (older subs that started paying that standard $9.99 for the service) and international subscriber growth (since increasing domestic penetration is becoming more difficult) are encouraging.
The second is with respect to Europe, especially after Brexit. The EU required Netflix to source 20% of its programming from within the union. In response, Netflix tried to get more original content, which naturally drove up costs. With Brexit pressuring the euro, there could be some difficulty in recovering these expenses. But if there are more expenses lined up, the weaker currency could turn out to be a positive.
Netflix stock carries a Zacks Rank #2 and it has met or exceeded estimates in each of the last four quarters at an average rate of 92.5%.
Facebook, Google Impacted by Brexit
These two giants offer different things but primarily depend on advertising for their bread and butter. They therefore try to collect your data, process it and sell you suitable ads. Because of this, and the fact that they also try to avoid taxes by locating their EU headquarters in the most lenient UK, they can have Brexit-related problems.
Facebook, which has a Zacks Rank #3 (Hold), has a good earnings surprise history. The company has been going from strength to strength, from Instagram to Oculus to Messenger and WhatsApp. Yet it is primarily the main social networking platform that is expected to grow revenue and earnings at 40%+ and 80%+ rates this year. The valuation is also attractive (PEG of 1.34 compared to 1.56 for the industry).
FACEBOOK INC-A Price and Consensus
At the bottom is Alphabet with a Zacks Rank #4 (Sell) despite the expected double-digit revenue and earnings growth this year. One of the biggest dampeners for this stock is its recent earnings surprise history. The stock has missed estimates in three of the last four quarters, suggesting that even analysts aren’t able to properly gauge its performance. For more details see Why Alphabet (GOOGL) Stock Is Rated A Sell Right Now.
FANG stocks have moved around quite a bit this year, so it’s best to use the Zacks methodology to see if they’re worth adding to your portfolio right now.
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