January was a blood bath for technology stocks, and even the well regarded FANG stocks – Facebook, Amazon, Netflix and Google – copped it sweet for most of the month. Investors have been skittish around highly anticipated results. Facebook, down about 10 per cent at one point last month, soared to a record high post earnings after it delivered on mobile and added users. Amazon was given short shrift despite its best quarterly revenue ever, punished for coming up short on profitability.
It begs the question: is the FANG concept dead because performance is simply too diverse and it’s nonsensical to group them together (much like the Brics)?
The biggest storm cloud for the tech greats’ short-term performance is valuation. Heady price-to-earnings were questioned during the January correction and the FANGs may still carry too much hot air.
Marc Faber, editor and publisher of The Gloom, Boom and Doom Report, is a notorious investing bear and is negative on the tech darlings. “These are wonderful companies – for instance Amazon, you need to give them credit as they upset the retail space globally – but it is a question of valuation. The Facebooks of this world, Amazon and Google, these are highly priced companies,” said Faber.
Others disagree and argue that, on a longer-term horizon, valuations might even look well-placed. “These companies still have tremendous earnings power,” said Jean Medecin, member of the investment committee at Carmignac.
“It’s about Amazon versus Facebook, what kind of earnings growth can you deliver? The valuation remains right – today Facebook is generating around $17bn of revenue. This is what Google used to generate in 2007 and today Google is making $60bn of revenues. It’s not the fact that they have grown so much they can’t grow anymore. It’s really whether they have a great market and great earnings power,” he said.
Investors have leant towards FANG as the macro environment has become increasingly uncertain. “Given the issues we have over the energy complex, foreign exchange wars and China, let’s go for those [firms] who are very strong cash compounders that have high returns and strong outlook”, says Neil Campling, global TMT analyst at Aviate Global.
But Campling has been warning about the idea of buying FANGs and other high profile tech stocks since 2015, and is only willing to add Facebook because of the valuation gap with its peers.
Facebook traded at one of its lowest multiples on record before its earnings release last week. “I can buy Facebook on 33 times forward earnings, which is low compared to its trend since it has gone public. Alternatively, would I rather buy Netflix that trades on 480 times, and would I rather buy LinkedIn that trades on 55 times and which we actually think Facebook will crush this year?” said Campling. He pointed to Facebook’s professional version, which launches this year and plans to go after LinkedIn’s lifeblood.
Market shorts have mounted around some tech names, but leaning too aggressively against potential prey could be problematic. “Twitter is a dangerous short. They are now quite small in market cap and it would be a couple of weeks of cash flow for Apple to buy Twitter,” said Campling.
Perhaps it is time to cast the net wider and take a nibble at more than just FANGs if you have appetite for technology stocks and hate the macro.