This article was featured on The Australian on 21st April, written by Macrovue's Head of Investment Committee, Clay Carter.
"FANG", not a sector any investor can ignore
Technology stocks, particularly the “FANG” variety have been for sale since late January. Market leaders in 2017, the sector has been hit hard by Facebook’s data woes and the possibility of increased scrutiny and regulation by government agencies.
At almost 25% of the S&P 500 and containing some of America’s most dominant companies, it’s not a sector any investor can ignore and if the broader market is to recover it needs leadership from this group.
Let’s consider some of the main players and what they are doing.
What about Facebook? My sense is that Facebook may have to undergo scrutiny from regulators on political ads not unlike the rules that traditional advertising channels have to follow. The company also has to regain the trust of its users relative to personal data. This is doable although rejigging the news feed and relationships with advertisers may impact margins going forward.
Most likely near-term volatility will persist (mixed user metrics, regulatory headlines, etc.) however for long-term minded investors it may be an opportunity.
WhatsApp and Instagram are doing well
Facebook’s two “other” growth engines WhatsApp and Instagram are still intact and doing well I might add. A good 1Q 2018 earnings report could well lay many of these fears to rest.
That said, at US$157.00 FB is trading at 15.1 X 2019 EPS. Cheap relative to its EPS growth rate of 20% plus. Facebook peaked at US$193.01 on Feb.1 and now has fallen almost 20%.
A recent Trump's tweet
Amazon has recently been pressured by President Trump’s comments delivered via Twitter. Trump recently tweeted about Amazon costing the U.S. post office billions “for being their Delivery Boy” and being a “no-tax monopoly”!
Truth is, package delivery is a highly profitable business for the U.S. post office. It’s losing money due to huge pension liabilities. Amazon pays tax like any other U.S. domiciled corporation (effective tax rate was 40% in 2017).
Hardly a monopoly
Sales taxes for on line transactions are a state matter and if broadly imposed are unlikely to dent Amazon’s appeal. Amazon represents less than 10% of total U.S. retail sales- hardly a monopoly.
The case for Amazon isn’t one of valuation but growth. Drivers? Amazon’s investments in retail fulfillment and cloud-services capacity will keep driving rapid sales growth and market-share gains admittedly at the expense of near-term profitability.
Sales have grown in excess of 30% over the past eight quarters-proof that AMZN has the ability to execute this strategy. Moving into groceries via Whole Foods may also see sales pick up with free home delivery. International expansion of Prime and cloud should drive sales in the near term.
After Facebook, Alphabet (Google) is the second under-performer of the group, down 4.1% YTD but like Facebook is one of the better valued FANGs trading at 20 X 2019 EPS.
Alphabet is relying on mobile ad sales and cost controls to drive earnings as its second wave of revenue streams develops.
Cloud services, hardware and YouTube are set to become increasingly important revenue sources in 2018. Any new data privacy regulations are unlikely to impact search.
Sustainable sales growth
Alphabet's sales growth is likely to remain sustainable amid gains in mobile-search volume and programmatic ads. Increasing traffic-acquisition payments to ad-hosting network sites and distribution partners, such as Apple, are paying off.
Hardware development and better distribution channels for the cloud business also underpins the 2018 outlook.
A pioneer in artificial intelligence
Google is a pioneer in artificial intelligence and this business could well provide long-term growth. There are 1,000+ deep-learning / AI projects underway with applications across Search, YouTube, Android, Gmail, Photos, Maps, and Translate. “Waymo” Alphabet’s autonomous vehicle and mobility division is also expected to contribute as well.
Netflix hasn’t escape the sell off either. The stock is down 12.8% from its high on March 9- more a function of being part of the Fangs.
124 million subscribers and sales growth
Netflix is a subscriber story. The company has more than 124 million members globally, thanks to the breadth and depth of its content, as well as an impressive roster of original programming like "Stranger Things" and "The Crown."
Sales rose more than 30% in 2017 by virtue of its strong content line up and should be boosted further by a recent price increase. International has been a growth engine as well with overseas generating about 47% of sales in 4Q.
That said, Netflix’s booming subscriber growth has come at the expense of free cash flow. With a content budget of $8 billion in 2018, cash burn may double to $4 billion this year.
Like Amazon, Netflix is very much a growth proposition and valued accordingly.
FANG's Q1 2018 earnings
Over the near term, it’s likely that the Q1 2018 earnings reports from these dominant and disruptive companies could well stabilize the sector. Consensus estimates for revenues and earnings as supplied by Wall Street analysts show absolutely no changes at all in spite of all the negative news flow.
When you consider some of the most powerful themes that will continue to affect our personal lives and the economy into the future ie Self-Driving cars, Social Media, 5G, Internet of Things, Electric Vehicles, and Artificial Intelligence (AI), you realize that they are ALL enabled by technology and especially by many of the companies that have been sold off in the recent tech rout-not just the “Fangs” but also Microsoft, Tencent, Alibaba, Qualcomm, Nvidia, Intel, Tesla, Texas Instruments, Infineon etc.
Their share prices may fluctuate but these companies are here to stay in my view.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.