In early May this year, we published an exclusive investment idea article for AtlasTrend’s members called “Top 3 Reasons for Owning the World’s Most Famous Technology Stocks”. In that article we outlined exactly why we owned three out of four so called FANG stocks in our thematic managed funds.
The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
The term FANG stocks is commonly used to refer to some of the world’s leading technology companies being Facebook, Amazon, Netflix and Google (or Alphabet which is Google’s official stock trading name). Together, these 4 companies have a combined market capitalisation equal to the entire Australian share market.
Since that detailed article was published (which you can access in full for free by signing up here), all 4 FANG stocks have increased in price by 5.6% to 15.7% in just under 4 months in US$ terms. Yes, the Australian dollar over the same period has appreciated 3% but even including that impact, an Australian investor would still have made a very decent return.
So are any of the FANG stocks still a buy following their recent strong share price performance?
Facebook – Nearly Unstoppable
Would it surprise you that over the last 5 years Facebook has added on average 200 million active users globally per annum?
Let’s put that into perspective. 200 million people is equal to nearly 9 times Australia’s entire population who become new Facebook users every year. This astonishing user growth is one of primary drivers of Facebook’s rapid revenue and earnings growth.
With a total of 1.7 billion users, Facebook now has one of the largest audiences for advertisers to target. In the most recent quarter (Q2 FY2016), the company generated US$6.2 billion of advertising revenue, an increase of 63% compared to the prior comparable quarter in 2015. On a revenue per user basis, this metric increased by 42%. Over the same quarterly period, the company delivered US$2.8 billion of net income, nearly doubling the net income it made in Q2 FY2015.
The earnings equation for Facebook remains relatively simple. As it adds more users, it becomes even more attractive to advertisers, who then spend more money advertising on Facebook. The company’s recent financial results clearly prove this is happening. Currently trading at 24x FY2017 P/E with 29% forecast earnings growth, Facebook continues to be a very attractive investment.
Amazon – Crossroads of Online Shopping & Big Data
Amazon is one of those unique companies that is exposed to both the rapid growth in online e-commerce and also the exponential growth in data generation globally. With its 270 million active customer accounts, Amazon knows a tremendous amount about its customers. This provides the company with a key competitive advantage versus other retailers through the use of big data customer analytics.
The company has also cleverly leveraged its big data knowledge to build the Amazon Web Service business which provides commercial cloud computing and analytics services. This division is already becoming a future earnings powerhouse for Amazon.
Are Amazon shares really expensive?
Let’s have a look at the company’s earnings profile first. For many years Amazon has been focused on growing revenues as fast as possible given the huge potential market up for grabs. This often led to meagre levels of profits but this has started to change. For example, during Q2 FY2016, Amazon made operating income of US$1.3 billion, approximately 3 times what it generated in Q2 FY2015. It is now starting to prove to the market that it is able to generate growing margin from its huge revenue base (e.g. US$107 billion revenue in FY2015).
Trading at 46.7x FY2017 P/E, Amazon is not cheap on a traditional valuation metric. However, the company’s proven track record of very high revenue growth plus its recent ability to start making meaningful earnings shows there is great potential for the share price to keep climbing higher. If you are a strong believer in the growth of online shopping or big data over the next decade, then Amazon should be an investment in your portfolio.
Next week, we will bring you Part 2 of this article focusing on Netflix and Google. In the meantime, click here to sign up and access the detailed investment ideas article “Top 3 Reasons for Owning the World’s Most Famous Technology Stocks” exclusive to AtlasTrend’s members. It contains detailed exclusive investment insights from AtlasTrend’s investment management team on the FANG stocks which have increased in share price by up to 16% since that article was originally published.