Investing is hard. This is a fundamental fact of life. The FAANG stocks have been dominating your investment newsfeed for what seems like an eternity, and they are crashing. I use the term “crashing” loosely, of course.
Let’s quickly get up to speed on what is going on with the companies that comprise the FAANG group. You may not care about the respective stocks that make up the group, but you should. If you own tech or large cap index funds, you have A LOT of exposure to the following companies.
Facebook (FB): If you didn’t see their weak numbers and terrible guidance coming, you are not alone. The vast majority of analysts didn’t either. Analysts are the guys and gals responsible for predicting what kind of growth (or lack there of) a company is estimated to produce over different time periods. This is an imperfect science, not so different from meteorology.
Ultimately, consensus thought the personal information drama and headline risk was behind Facebook. IT WASN'T. And there isn’t a clear path out of the storm. Subscriber growth is slowing (shocking I know), and margins should compress moving forward.
This is all primarily due to the fact that Facebook is going to try and regain consumer confidence by keeping people’s data more secure. It seemed like they said they were going to do this months ago, but apparently, they have only just begun. This is going to make it more difficult for Facebook to charge huge premiums for targeted marketing, assuming they actually protect user’s data more effectively in the future.
The stock is trading significantly below its high because there is meaningful uncertainty around future growth.
Amazon (AMZN): Amazon quietly had another solid quarter. The price is down over 5% from its high, but the decline is not necessarily associated with underlying fundamentals. AMZN reported solid growth in every aspect, save for some small misses related to their long-term growth plan. Specifically, revenue was lower on their digital content as people moved from “pay as you go” to subscription services.
It is hard to tell, but it would seem as though the required Prime membership for discounts at Whole Foods may have contributed to this. After ponying up for the membership, people realized they didn’t have to pay $6 every time they want to watch a movie. This wasn’t great for immediate profitability, but they may believe that it could be solid for maintaining loyalty to their ecosystem of services.
It is important to note that Walmart is legitimately challenging for market share in both online goods as well as efficient groceries; however, there seems to be enough demand for both companies to thrive in these areas.
Apple (AAPL): Apple just crushed their earnings estimates. This wasn’t necessarily unexpected based on the continued stability in the stock this year.
One thing that people may not have focused on while being inundated with potentially bad iPhone sales projections is the fact that Apple’s ecosystem has grown dramatically over the last year. People have began continually upgrading their cloud storage for what seems like tiny amounts of money per GB, but this has drawn people ever more attached to their Apple devices.
The company has not shown many groundbreaking innovations over the last few years, and many analysts seem to focus on that aspect when determining a fair value for the company. It is important to point out that Apple seems to have managed to find a way to monetize their loyal base without having to sacrifice user data for advertising purposes.
Netflix (NFLX): Similar to FB, NFLX has experienced a 20%+ fall from its highs, albeit for different reasons. There is still a ton of buzz about their platform and the incredible content they are producing. In fact, they have seen little to no push-back on the price increases for their subscription services. With the strength of the economy and the solid consumer data, NFLX should be doing great, right?
Well, earnings have been good, but not as good as analysts expected. Moreover, user subscription growth has slowed, especially overseas. With the US market effectively saturated, they will need to continue to see outsized growth in other markets to justify a 154 P/E ratio. Whether that happens or not is anyone’s guess.
There are other competitors in streaming, but none of them have the proprietary content NFLX does. Only time will tell if this is a great buying opportunity or a trap.
Alphabet (GOOG/GOOGL): Google is off its highs as well, but the company appears to be on solid ground. Depending on how closely you follow stocks, you may have missed the massive fine the European Union levied on the company.
We’re talking $5 BILLION dollars type of massive.
The reasoning for the fine is somewhat suspect, depending on who’s opinion you are getting, but the fine dramatically impacted the earnings report.
Initially, we thought Google came up with a glorious quarter. They effectively beat the consensus estimates by more than 20%. Then came the fine. RUH ROH, RAGGY! After the fine, they missed estimates by roughly 50%. Sad!
Nobody really knows how this will play out in terms of the ever important “trust factor” with EU consumers, but I would assume that people would still use their Android smart phones and Google search as time goes on. This seems a bit like bureaucratic overreach, but it is not my place to judge.
If you were wondering how the stock could be up immediately after earnings and tank a day later, you don’t have to wonder anymore.
Final Thought: Investors need to determine their risk tolerance and time horizon before electing to buy any stock. These stocks are no different. Ironically, if you own an index ETF, you probably have a bunch of exposure to these companies.
Go look under the hood and determine if you want to stay the course with these companies. They may not all fit your risk profile, and only you (or a good advisor) can determine that. Just remember that passive investing could be a great way to get started, but by no means is it the only way to make money over time.
If you care about maintaining wealth and managing volatility, there are more efficient ways to achieve those goals than having 12% of your S&P 500 fund invested in 4 companies (or 38% of your Nasdaq fund invested in 5 companies).
Required Disclosures:
Any opinions are those of Alexander Leonida and not necessarily those of RJFS or Raymond James.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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