The acronym FANG represents what has seemingly become the most popular investment strategy of the last few months. FANG comprises 4 stocks: Facebook, Amazon, Netflix and Google. These companies are the market’s darlings for good reason; since June they are up on average 40%, whereas the S&P 500 is flat over the same period.
Before you rush to buy these gems we thought it would be helpful to review some basic fundamental data in order to clarify exactly what investors are assuming when they purchase these stocks. The analysis in the table below reflects the change in revenue, profit margin or income required for these companies to have the same price to earnings (P/E) as the S&P 500. The data highlighted in blue represents the revenue, margin or net income required to bring each P/E to the market average of 18.6. The data in yellow highlights the percentage change required to bring each P/E to the market average.
Company Comments
Facebook (FB): Revenues were up 25% year-over-year in the most recent 12 month period but growth is slowing as garnering additional market share becomes increasingly difficult. While deeper market share penetration can certainly be aided with mergers and acquisitions, revenue expectations are tremendous. One has to seriously question the ability of how, what is essentially an advertising company, can generate such growth in an extremely competitive and trendy industry.
Amazon (AMZN): The table above shows that Amazon would need to see an astronomical increase in revenue to better justify its valuation. However, one must consider that margins are likely to increase in the future. If we make the huge assumption that they can improve their margins to be similar to those of Walmart (5.5%) Amazon would then still need to almost triple revenue to become fairly valued versus the S&P 500. Increasing their profit margin to 5.50% likely comes at the cost of losing market share, thus revenue. Increasing margins in a commoditized business like Amazon’s, highlights the significant challenges Amazon would have to overcome in order to normalize its P/E ratio. At current margins, revenue and income normalization to the S&P 500 is virtually impossible.
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