FAANG stocks — Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOG, GOOGL) — continue to demolish the stock market, posting average year-to-date returns of 40%, compared to 7.5% rise for the S&P 500 index.
The collective outperformance of FAANGs come even as both the Nasdaq Composite Index and the S&P 500 logged all-time highs on Friday. And the fact that FAANG stocks account for just 12.8% of the S&P 500 makes it even more remarkable, dispelling the notion that FAANG is doing all the heavy lifting. That said, not all FAANGs have participated equally.
The phrase “If you live by the FAANGs, you die by the FAANGs” was magnified following the declines of both Netflix and Facebook following their earnings results. The latter, in particular, suffered a 19% tumble after warning investors that revenue growth will take a hit in the second half of the year. Facebook’s decline, which equated to one-fifth of its value ($120 in market cap), quickly spread to the other FAANG stocks.
The question is, can these tech titans maintain their “no-brainer” standing in the second half of the year, especially when analysts continue to warn that the "long FAANG" strategy is still the most-crowded trade on the market. In a recent investor note, Michael Hartnett, chief investment strategist at Merrill Lynch, advised investors to short the FAANGs during the second half of 2018.
However, Piper Jaffray analyst Michael Olson disagrees and he continues to expect the FAANG machine to power through. Only time will tell which investment strategy (long or short) wins out. But here’s a few company-specific factors investors should keep an eye on when making their decisions.
Facebook - Price $174.65 - Target $250 - Premium: 43%
Quick Take: Facebook guidance and slowing user growth spooked investors. In Q2 monthly active users (MAUs) rose to 228 million year over year basis and 38 million sequentially to 2.23 billion. However, the growth rate marked a significantly slowed down from Q1 when Facebook added 260 million users year over year and 67 million sequentially. Plus, the company’s says it expects expenses, particular in safety and security, to increase faster than revenues in 2019. Nevertheless, investors ignored the fact that advertising revenues soared 42.3% year over year to $13.04 billion. Thus, I see the decline as a solid buying opportunity.
Amazon - Price $1,905.39 - Target $2,150 - Premium: 13%
Quick Take: The e-commerce giant enjoyed 30% surge in net product sales in Q2, reaching $31.86 billion and driving overall Q2 revenues to $52.9 billion (up 40%). The company’s bread-and-butter AWS (Amazon Web Services) Cloud business, meanwhile, skyrocketed 49% to reach $6.12 billion, translating to a 12% sequential gain. All told, Amazon now owns 34% of the total cloud computing market as of the second quarter, according to Synergy Research Group. So, despite its 63% year-to-date stock gains, Amazon is showing no signs of slowing down.
Apple - Price $216.16 - Target $250 - Premium: 15.65%
Quick Take: Fears around weak iPhone X demand, prompting the market to take"wait-and-see" approach, were once again surfacing, but those concerns turned out to be baseless. But following better-than-expected results, including revenue, profits and iPhone unit sales, Apple shares soared to all-time highs. Not only did Apple demonstrate strength in its Services segment (now 15% of revenue), the company's better-than-expected outlook drove Apple to a $1 trillion market cap. Despite this status, Apple is still arguably the cheapest stock on the market, when factoring its $253B in cash.
Netflix - Price $358.82 - Target $420 - Premium: 17%
Quick Take: Netflix’s Q2 results sent the stock falling some 10% as the company reports 670K domestic streaming additions, which not only missed consensus 1.21M, but also missed the company’s own guidance for 1.20M. International streaming additions were up 4.47M during the quarter, which was also short of the 5.06M analysts were looking for. It’s broadly understood, however, that the World Cup was a major factor in those results as the soccer spectacle, which draws billions of fans globally, stole the world’s attention from those who would otherwise stream content from Netflix. But the decline has made NFLX more attractive for who have waited for a better entry point.
Google - Price $1,236.75 - Target $1,450 - Premium: 17%
Quick Take: An impressive surge in paid clicks lead to an easy beat on both the top and bottom lines in the search giant’s Q2 results. Revenues grew 26% year over year, while operating income came in a $2 billion despite a hefty fine on EU. Excluding the fines, net income would have risen to $8.26B from $6.26B. The major story here, however, was the 58% Q2 surge in paid clicks, compared to a rise of just 15% in Q1. Ans with Cost-per-click falling 22% year over year and 10% sequentially, Google was able to dispel fears that profit margins would remain under pressure, suggesting it deserves more time to adjust its business to adapt to a changing regulatory landscape.