FANG, the acronym for Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL) (formerly known as Google) was the staple for comparison throughout 2015. These stocks were by far the best performers over the last year, with Netflix and Amazon the winningest of them all. If you put your money in any of these four stocks, you tremendously outperformed the overall markets. And, if you put your money in either of the middle two letters, you doubled your money -- and then some.
These gains are impressive and, on their own, are not a reason to sell. Just because a stock doubled in price over a 12 month period does not mean that it won't move higher in the next 12 months. In a turbulent market, the names that compose FANG are actually good places to be. The appeal of these companies is their growth, which can often maintain its trajectory in a lackluster economy.
However, it's possible that these names are becoming overheated. I'm seeing some action in three of the four FANG names that should get you a little concerned going forward. While I believe in each one of these companies in the long haul, I think the next fiscal year won't be so pretty. If you've enjoyed the ride higher, you may want to realize some of these gains and wait for better prices to reenter. I do think that these prices will come but, given the beta of these names and the overall market volatility of late, I would not be short any letter of FANG.
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If you told investors during Facebook's (NASDAQ:FB) first month of trading that the company would be worth more than retail-giant Walmart (NYSE:WMT), they would insist that you're crazy. FB tumbled roughly 27% from its IPO price of $38.00 to $27.72 come the market close on June 1, just 9 days later. Facebook is now the umbrella company of Instagram, Oculus VR and WhatsApp, three of the roughly 50 companies that Facebook has purchased since 2005. On their Q1 2015 conference call, CEO Mark Zuckerberg commented on the users of various components of the business:
"[Facebook] is continuing to make progress for the years ahead. Facebook has evolved from a single blue app on your phone into a family of apps. Now, many of these apps are reaching a global scale. More than 1.4 billion people use the core Facebook service, 800 million also use WhatsApp, 700 million use our Groups product, 600 million use Messenger, and on Instagram, there are more than 300 million active members of the community." The company is the king of advertisement - and that is far from a bombastic title. Perhaps one of the most unrealized aspects of Facebook's business model is the method the company uses to integrate ads on their family of apps. It is easy to see now, with the development of Facebook's core website, the effectiveness of this strategy. When addressing a question on the Q1 call regarding the speed at which ads will appear on Instagram, Zuckerberg shed light on this process. "The primary goal is to increase the quality. That's our strategy for growing the business. There's more inventory that we can open up on Instagram over time because it's so early, but we're going to do that once we get to formats that are working well for businesses and that we feel really good about in the consumer experience. And this has been a theme for our ad strategy and product development for more than a year now, maybe two years, where folks have consistently asked us what we're going to do to increase the amount of ads that we're showing. And our response has been that we're going to focus on improving the quality and relevance and that's both going to perform better for the people using our services and businesses who are buying ads. And that strategy, I think, is bearing out and we'll continue to apply it to all of the things that we do." With the above in mind, the company's numbers seem totally expected. On its core "blue app," Facebook saw 4 billion video views each day (75% of which occur on mobile). Compare that to June 2014 when the site averaged 1 billion daily video views, and to YouTube's current 8 billion views per day, and Facebook's growth and ability to narrow the playing field between the sites is nothing short of astonishing. Brands and icons alike have been stepping over Google's (NASDAQ:GOOGL) YouTube and publishing videos straight to Facebook. Zuckerberg took yet another stab at closing the gap and driving incentive for such behavior when he recently announced that the company would share ad revenue with video producers. Facebook has been quick to partner with household-name content providers such as Funny or Die and Fox Sports, and cuts them 55% of the revenue. This revenue split is identical to YouTube's payout. Seeing as many high-revenue videos on Google's video site are from celebrities - such as music videos - posting the same videos to Facebook would prove to be a logical and lucrative move due to their large fan bases already on the site. One way the company stays ahead of the curb is through mobile. Facebook the company penetrates the platform from every angle. Facebook the website has become increasingly popular on mobile, with nearly 1.25 of the 1.44 monthly users accessing from a mobile device. One out of every five minutes spent on Instagram and Facebook is spent on a phone or tablet. As a result, it's not surprising that mobile ad revenue was up 82%, and now accounts for 73% of the company's revenue. Facebook again showed why it is the king of digital ads, leaving Twitter in the dust with their innovative ways to drive ad-growth. Facebook introduced one noteworthy new product that encourages advertisers to follow users to mobile. The Mobile Ads Manager allows advertisers to easily manage ad campaigns from their mobile devices. COO Sheryl K. Sandberg said "It's early, but we're already seeing more marketers managing their activity on mobile." While it may not seem like a big deal at the moment, Facebook's features tend to be very sticky, and this one feature could prove to be a key driver of ad-revenue growth. Revenue is obviously an integral component of any company, but what about the bottom line? For starters, Facebook is a company that suffers from a strong dollar. The dollar strengthened over the course of Q1, and in March, Facebook's year-over-year total revenue growth rate was roughly 10% lower than it would have been with constant currency. The company reported mixed earnings with revenue that missed the $3.56 billion estimate by $.02 billion, but beat the $.40 EPS estimate by $0.02. FB trades at roughly 63 times the mean 2015 EPS forecast and approximately 29 times the mean 2017 EPS estimate. If you isolate Facebook's earnings and compare the company to Google, the only real competitor at present, Facebook seems incredibly expensive. Google trades at 24 times the mean 2015 EPS estimate, and 18 times the mean 2017 estimate. I understand this comparison, but I think that it is extremely unjustified. There is a reason why FB and GOOGL have been diverging, with the former grinding higher and the latter trending downward. Among many, the main reason is that Facebook is an unparalleled, innovative company that thinks about communication not only in the present day, but for years down the road. It is for this reason that I think the seemingly under-the-radar $2 billion acquisition of Oculus VR will prove to be a vital source of ancillary top and bottom line growth. On March 25, 2014, Zuckerberg wrote, in a Facebook post, about the prospects of the acquisition. "I'm excited to announce that we've agreed to acquire Oculus VR, the leader in virtual reality technology. Our mission is to make the world more open and connected. For the past few years, this has mostly meant building mobile apps that help you share with the people you care about. We have a lot more to do on mobile, but at this point we feel we're in a position where we can start focusing on what platforms will come next to enable even more useful, entertaining and personal experiences. This is where Oculus comes in. They build virtual reality technology, like the Oculus Rift headset. When you put it on, you enter a completely immersive computer-generated environment, like a game or a movie scene or a place far away. The incredible thing about the technology is that you feel like you're actually present in another place with other people. People who try it say it's different from anything they've ever experienced in their lives. Oculus's mission is to enable you to experience the impossible. Their technology opens up the possibility of completely new kinds of experiences. Immersive gaming will be the first, and Oculus already has big plans here that won't be changing and we hope to accelerate. The Rift is highly anticipated by the gaming community, and there's a lot of interest from developers in building for this platform. We're going to focus on helping Oculus build out their product and develop partnerships to support more games. Oculus will continue operating independently within Facebook to achieve this. But this is just the start. After games, we're going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home. This is really a new communication platform. By feeling truly present, you can share unbounded spaces and experiences with the people in your life. Imagine sharing not just moments with your friends online, but entire experiences and adventures. These are just some of the potential uses. By working with developers and partners across the industry, together we can build many more. One day, we believe this kind of immersive, augmented reality will become a part of daily life for billions of people. Virtual reality was once the dream of science fiction. But the internet was also once a dream, and so were computers and smartphones. The future is coming and we have a chance to build it together. I can't wait to start working with the whole team at Oculus to bring this future to the world, and to unlock new worlds for all of us."
Although Facebook has unveiled many of the tricks up its sleeve, it still lacks a real-time component. Some feel that by using none of Facebook's current family of applications can a person feel as though they're sitting in the crowd at a baseball game or dancing at a concert. This feeling can only be achieved on Snapchat or Periscope, the live-video company that Twitter (NYSE:TWTR) recently acquired.
I think that while Facebook is certainly poised for good numbers as it has been making strategic acquisitions, the addition of a company that would rival Snapchat is an acquisition that could send the stock higher. $100 Price Tag Going into Q1 earnings, FB had an average earnings surprise of 12.38% over the previous 4 quarters. Apply the average surprise to the mean 2017 EPS estimate, and Facebook is slated to earn $3.29 per share. At its current price of $85.70, the stock would be valued at 26 times 2017 earnings. As previously stated, it is unfair to value the business solely by this metric. This brings me to the $100 price tag. Slap that price on earnings of $3.29, and suddenly Facebook trades at only 30 times 2017 earnings. While many investors may not think that the word "only" belongs in front of a P/E ratio of 30 times 2017 earnings, I think that given the intense growth that Facebook is known for, it deserves a higher valuation than its peers and the company's forward P/E is completely justified and deserving. The triple digit price tag represents just shy of a 17% increase from today's close, and with Q2 earnings scheduled for July 29, this could be a catalyst that takes the stock there. |