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FANG Stocks Are Still Cheap, More Gains To Come In 2018

Michael kramer and the clients of mott capital own shares of googl, nflx, and aapl
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With earnings season pretty much finished, analysts have been steadily adjusting estimates, and as a result, valuations have been re-weighted. It leaves me to believe that the FAANG’s will continue to have a strong run, and likely continue to be the market leaders.


Amazon

Amazon’s earnings estimates for 2018 have increased by 44 percent, and the street now sees the company earning $12.38 per shares, year over year growth of nearly 172 percent, while revenue is forecast to rise by almost 34 percent to $237.26 billion.
One must remember though that Amazon is not valued on a PE or earnings basis.

Amazon always has, and likely always will be evaluated on a sales basis. I’d hate to say it because I know many will not be happy to hear, but the stock based on its historical sales basis is not cheap, trading at currently 2.7 times next year’s sales estimates. The chart below shows that it is the highest multiple in over the past three years.

Fundamental Chart Chart

Fundamental Chart data by YCharts

Now, I realize that the dynamic of Amazon Web Services adds another layer of growth, that wasn’t there three years ago, we must assume a premium to historical trends is warranted, but one should be aware.

Amazon is a key to this market. I’m not saying I think Amazon is about to plunge, I’m just saying that the stock’s outperformance from this point forward for the balance of this year may be limited.


Facebook

Facebook’s estimates have also been tweaked higher, not nearly as much as Amazon. Forecasts over the past 30 days have climbed by 2.6 percent, and analysts now see Facebook’s earnings at $7.48 per share in 2018, a growth rate of 21.5 percent versus last year, while revenue is seen climbing nearly 39.25 percent to $56.61 billion.

Unlike Amazon, Facebook is trading at the cheapest earnings multiple in over the past three years. In fact, the last time shares were this cheap was in January of 2017, and we all know how good the year 2017 was for Facebook.

Fundamental Chart Chart

Fundamental Chart data by YCharts


Alphabet

Alphabet is another stock that is expected to have significant growth in 2018. Earnings estimates have been adjusted higher by about 5 percent since reporting results and are now seen climbing by 35 percent in 2018 to $43.26 per share. Meanwhile, revenue is expected to rise by 22.36 percent to $135.65 billion.

Alphabet is trading at 22.7 times 2019 earnings estimates, and while shares are not at their cheapest levels, they are not at their most expensive, trading at just 22.7 times 2019 estimates. It puts Alphabet in a strong position to continue climbing.

Fundamental Chart Chart

Fundamental Chart data by YCharts

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Netflix

Netflix is a subscriber growth story, which makes it more of a sales growth story, than an earnings growth story. Earnings for Netflix have been adjusted higher by 5.78 percent to $2.88 per share, while revenue has been upped to $16.10 billion in 2018, representing growth of 130 percent and 37.7 percent, respectively.

I created my crazy way to value Netflix, based on what I understand the story to be. I take the Market Cap and divide it by the number of Subscribers. I do this to get a sense of how the market values each subscriber. It looks like this:

Then I multiply it by ARPU. I do this because as subscribers grow, it creates more revenue, and as the ARPU also increases it also generates more revenue. Essentially each new subscriber added is worth more than the previous subscriber added. It looks like this:

We can see the market valuing subscribers at a much higher level than in the past. My thought process is that value will only continue to climb, because ARPU is now on a steady path higher.

While Netflix is not cheap today, it may be reasonable when considering that ARPU will continue to climb, as price increases continue to take hold, and subscribers continue to rise.


Apple

Finally, Apple’s estimates are unchanged for this year, at $11.55 per shares, and revenue of $261.12 billion, growing at 25.45 percent and 13.9 percent, respectively.

But the big thing for Apple, I believe will be a re-rating of the stock, as service revenue becomes the driving growth factor. Apple has never had a premium valuation because of the cyclical nature of the iPhone sales. But as service grows and becomes a more significant portion of total revenue, I believe the market will begin to give Apple a higher valuation. Will it ever be Netflix like, probably not.

But could it trade with more of a market like multiple? Sure. At 18 times 2019 earnings of $13.18 per share, Apple’s stock suddenly is worth about $240. I think if Apple can get another one or two-quarters of strong service revenue, I think that multiple becomes a reality.

That is it for today!

-Mike

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