Facebook, Amazon, Apple, Netflix and Google make up more than 25% of America’s benchmark S&P 500 index gains this year. The numbers these stock trades, collectively nicknamed FAANG, have racked up for investors are eye-watering. Can this performance continue?
F – Facebook is up +44.5% YTD, +33.1% over 12 months
A – Amazon is up +26.6% YTD, +22.9% over 12 months
A – Apple is up +38.0% YTD, +49.4% over 12 months
N – Netflix is up +34% YTD, +70% over 12 months
G – Google is up +17.4% YTD, +17.3% over 12 months
Most of the above FAANG stocks appear classic momentum investing. Some fear these tech stocks are over-bought. They cite dot.com worries, circa 2000, when tech stock trades crashed and burnt, as well as still relatively weak US consumer spending.
Plus, there has been a rash of underwhelming earnings wobbles. Wall Street analysts, for example, anticipated Amazon’s recent second quarter earnings would land around $1.42 per share. The reality was massively adrift at just 40 cents per share. Shocking numbers.
The online retailer titan claims expansion, sales and overall subscriber numbers (which came in better than expected) is the real story – The Earth’s Biggest Shop, as it is being called. Amazon’s talk is of vision and leadership. But its profits continue to be slender.
What profits voodoo is this?
Let’s prop up the bonnet and take a proper look. First, the loose FAANG moniker contains very different companies. Yes, Facebook, owner of Instagram and WhatsApp, has a strong tech element. But it’s also an extremely powerful advertising company.
Facebook has more than two billion users. And those two billion users have real pulling muscle for advertisers. For the April to June quarter this year, Facebook revenues leapt 45% while profits surged more than 70% to $3.9bn. Mobile adverts account for 85% of Facebook’s advertising revenues.
In contrast, Amazon, the biggest US online retailer, with 33% of the US online market according to Euromonitor (and with the potential to grab much more), saw its second quarter income slump 77% to just $197m (40 cents a share).
Reality check, please
But Amazon’s net sales for the second quarter were worth $37.96bn, up 24.8%. Professor Ruth Bender of Corporate Financial Strategy, Finance and Accounting at Cranfield School of Management told Capital traders need to separate the price of a company and the value of a company if they’re to understand the accounting maths.
“The price is what you’re willing to pay and the value is what it’s [the company] worth.” Amazon is tricky to value objectively, she says, because it’s thrown itself at so many different sectors.
“I do know, though, that Amazon’s core cloud operating business is immensely profitable. It’s because Jeff Bezos [Amazon founder and CEO] is flinging cash at things that may or may not take off. But you can still value Amazon.”
One of the difficulties in valuing online retail companies is understanding how they make money and how those profits are understood and projected, be it for stock trades or longer-term investments.
For example, in the late 20th century Walmart grew by building new bricks-and-mortar stores as well as exerting huge pressure on suppliers to keep prices low. The likes of Amazon or Facebook, in contrast, grew via digital marketing.
Digital marketing expenses are typically taken as a charge on profits and loss. Capital expenditure, in contrast, hits the balance sheet. That makes it harder to know how profitable or efficient a company is because a balance sheet encompasses capital-intensive assets that digital, often highly ‘disruptive’ companies, often, have no need for.