Last week we published “Which FANG stocks will make you a lot of money?” which you can access for free here. That article looked at the strong performance of Facebook, Amazon, Netflix and Google shares with a particular focus on why Facebook and Amazon continue to be very good investments.

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. 

 

This week let’s focus on Netflix and Google (or Alphabet, as the official trading name of Google is now called). As a reminder, the chart below shows how all the FANG stocks have performed since AtlasTrend’s members received their exclusive investment insights on which FANG stocks to invest in during May 2016 (which you can access in full for free by signing up here).

 

20160823 - FANG stocks performance infographic

 

As you can see, both Netflix and Google have increased in price by 7% and 10% respectively in under just 4 months. Should you still think about investing in those companies given the recent share price gains?

The simple answer is no to Netflix and yes to Google. Let’s find out why.

Netflix – No Thanks

Netflix is the online media streaming service that has gained popularity in the US and a number of other countries including Australia. Subscribers pay a fixed monthly fee for unlimited streaming access to a large amount of TV shows and movies. The more subscribers Netflix has, the more money the company makes.

Sounds simple right?

When we last wrote about Netflix a few months ago, one of our main concerns was the slowing growth of its subscriber base. This was again confirmed when Netflix reported that in Q2 2016 net new subscribers increased by only 1.7 million to 83 million. This net increase was below the company’s own forecast (of 2.5 million) and worryingly was nearly half the amount of net subscriber increase compared to a year ago. In its key US market, the company increased total subscriber numbers during Q2 2016 by only 0.3%.

Astonishingly, Netflix currently trades at a FY2017 price-to-earnings ratio (P/E) of 83.7x. The company’s recent slow subscriber growth numbers simply can’t come close to justifying this incredibly expensive valuation. After all, a number of other technology companies (including FANG stocks) trade at much cheaper valuations with better growth profiles.

20160901 - FY17 PE of FANG stocks infographic

Google – Online Search Plus the Next Big Thing

Google is the behemoth among the FANG stocks with a market capitalisation of A$706 billion. To put that in context, it’s market value is larger than the combined values of Australia’s top 10 listed companies by size.

Google has grown successfully to this size through its near monopoly of the online search advertising market where it has a 70% market share. The substantial majority of the company’s revenues are from this core business which continues to grow strongly. In Q2 2016, Google’s core business reported US$21 billion of revenue and US$7 billion of operating income, an increase of over 20% compared to Q2 2015. That is quite an achievement for a company the size of Google.

The strong performance of Google’s core business alone justifies the company’s current trading valuation of 19.6x FY2017 P/E. However, shareholders in Google also get the added benefit of the company’s investments in what it terms “Other Bets”. This is the division of the company that develops completely new technologies that may have far reaching benefits for millions or even billions of people worldwide. It includes technologies such as self-driving cars and biotechnology to increase human lifespan.

Do the “Other Bets” relate directly to Google’s core online search advertising business?

Not really but that is the beauty of Google’s thinking. The company is using a portion of the tremendous cash it generates from its core business to fund new technologies that may eventually result in tremendous benefits for society and of course financial benefits for Google’s shareholders. Even if only a small number of these “moonshot” projects turn out to be commercial successes, Google’s share price will no doubt rise even more.

Despite Google’s recent share price rise, the shares still represent a highly attractive investment particularly if you believe in Google’s innovation led business model.

For more useful information, you can access for free the detailed investment ideas article “Top 3 Reasons for Owning the World’s Most Famous Technology Stocks” exclusive to AtlasTrend’s members (click here to sign up). It contains more investment insights from AtlasTrend’s investment management team on all the FANG stocks which have increased in share price by up to 16% since that article was originally published in May 2016.

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