My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

FAANG+M Stocks: More of the Same

  • Amazon, Apple, Facebook, Google, Microsoft and Netflix (FAANG+M) stocks individually returned between 31% and 82% in 2020, compared to a return (excluding dividends) of 16.3% in the S&P 500 index for the year

  • Collectively on a market-weighted basis, these six stocks generated a return of 50.8% in 2020

  • The six stocks made up 23% of the S&P 500 index at the end of 2020, compared to 20% at the end of 2019. During the year, these stocks made up as much as 27% of the index at one point

  • NFLX reported its 4Q2020 results after the close on January 19th, which were favourable from a subscriber growth and cash flow perspective although the company missed consensus EPS. The other five companies (FAMAG) present their most recent quarterly results between Jan 26th and Feb 4th, and consensus expectations are for solid increases in earnings and revenues

  • With the exception of NFLX, all of these companies have large and stable balance sheets, strong debt ratings (or no debt at all), and substantial liquidity on hand to address threats going forward

  • With the exception of one company (FB), all six companies trade at richer valuation multiples (trailing P/E LTM or trailing revenues LTM) now than they did one year ago, potentially limiting upside going forward and making them vulnerable to earnings misses

  • These might be considered “core”, “original”, “old” or “historic” tech names. Nonetheless, their performance has been rock solid through a difficult period. In a subsequent post, I will look at how valuations of the FAANG+M stocks compare to some of the newer, high flying tech and WFH companies

 

As we begin the new year and earnings season, it is an appropriate time to revisit the FAANG+M stocks to check in on their operating performance and on the performance of the stocks since I last wrote about them in emorningcoffee.com on August 27th 2020 (link is here). #NFLX is the only of the infamous six companies to report their earnings so far for the last quarter of calendar year 2020 (released after market closed on January 19th). Although NFLX missed its consensus EPS target, the company reported stronger-than-expected subscriber growth and improvements in free cash flow, and the stock reacted with investors pushing the shares higher by 16.85% the following day. The other five companies (FAMAG) are expected to report 4Q20 earnings in the coming two weeks, in each case after the market closes:


I am not going to touch on recent performance of these companies because I have not looked in depth, although I am confident in saying that they all seem to be performing well from an operational perspective. The headline risks as I see them continue to be:

  • Antitrust: This is an issue in both the US and Europe, arguably involving at least five of these companies to some degree, with NFLX being the outlier (because it faces heavy competition, a separate issue perhaps)

  • Data-sharing / customer data ownership / GPDR: AAPL, FB, AMZN and GOOG all are facing increasing scrutiny over their collection, use and sale of customer data

  • Regulatory: This issue came to the forefront during the build up to and aftermath of the US Presidential election as several social media sites – namely FB (Facebook, Instagram), GOOG (YouTube) and Twitter ­­– all came under intense scrutiny as far as “policing” their content

  • Economy / business cycle: As we saw recently in the CV19-caused global recession, most of these companies are very resilient to downturns. However, the companies dependent most on advertising, namely FB and GOOG, are the most vulnerable in this respect.

In spite of these risks, it is important to remind you that with the exception of NFLX, all of these companies have very strong balance sheets and overall liquidity positions, and near the highest possible debt ratings (or no debt at all). They are all more than able to withstand pressures of all sorts on their businesses for long periods of times, including those risks articulated above.


The graph below from YahooFinance.com shows the relative performance of the stocks since the end of 2019, compared to each other and to the S&P 500 (bottom line). Note that this data is from the end of 2019 to the market close on January 20th 2021, so is for a longer period than just the 2020 calendar year (which is discussed further below).


As far as share performance throughout the year during 2020, AMZN and NFLX were deemed beneficiaries early in the pandemic as obvious WFH plays, and consequently, their share prices increased the most early on. You can see this trend in the table below, which illustrates quarter-by-quarter performance of each of the FAANG+M shares during 2020.


AAPL surged in 3Q20 due to a “recovery” from its pandemic-inspired retail store closures and overall solid results, benefitting also from a 4:1 stock split announced on July 30th, propelling it to the best performer of all six stocks for the year. Having said this, the top three performers were relatively close as far as performance – AMZN, AAPL and NFLX. MSFT turned in its usual solid performance across its product lines, becoming more focused on B2B as it shuddered its retail store operation. Both FB and GOOG suffered in the early stages of the pandemic because of recessionary / cyclicality concerns (re advertisers), and arguably continued to feel pressure later in the year as they had the most intense scrutiny over data-sharing and anti-competitive pressures, especially as the heat was turned up during the Presidential election.


Of course, the performance of the FAANG+M stocks has to be put in the context of the market overall. Whilst the S&P 500 index (excluding dividends) delivered a return of 16.3% in 2020 and the tech-heavy NASDAQ Composite delivered a return of 43.6%, the market cap weighted return for the FAANG+M stocks in 2020 was 50.8%! You didn’t do badly if you held the NASDAQ Composite, but the FAANG+M names collectively returned more than three times that of the broader S&P 500 index in 2020.


I have presented in the past the relevancy of these stocks in the index. Whilst they were as high as 27% of the index in 2020 intra-year (late August), they finished the year comprising a still very material 24% of the S&P 500 index, an increase from 19% at the end of 2019. Here is the progression of the FAANG+M names vis-à-vis the S&P 500 since the end of 2010. The graph is relative with both the S&P 500 index and the market-weighted FAANG+M "index" starting at 1.00 at the beginning of 2010.

The collective weight of the FAANG+M names on a market-weighted basis added 228bps/annum (CAGR) to the S&P 500 index return (dividends excluded) since the beginning of 2010, an 11-year period. In other words, extracting the FAANG+M stocks from the index – let’s call it the “S&P 494” – would have negatively affected the index by 228bps/annum, or circa 55% over the entire period.


The chart below has been included before but this one has been updated for recent results, stock prices, and perhaps more importantly, for expected sales and earnings this cycle, pending for all of the companies except NFLX which already announced its results. I would keep a close eye on the consensus figures in the bottom quarter of the chart in the coming two weeks.


Lastly, I would be remiss not to mention the risk of valuations, which are very rich at the moment. As you can see in the table below, all of the FAANG+M stocks have become more expensive during the last year whether valued by trailing earnings or revenues, with the possible exception of FB (by earnings). This highlights the risks associated with a broad market sell-off, and also might help you place your “relative value bets” on the most appropriate horse or horses. For context, the current trailing P/E of the S&P 500 index is 38.1 according to mulpl.com, and the price-to-sales (same source) is 2.8.

As I was writing this article the past couple of days, I must admit that I was caught completely off-guard by the “inauguration day rally” yesterday, which – helped by solid results from NFLX – pushed the FAANG+M stocks significantly higher on the day. All of the charts and tables have been undated accordingly.


In conclusion, some or all of these stocks should be core holdings in portfolios, so long as the “heady” valuations are acknowledged and the risks understood. One thing is for sure – these stocks all have the fundamental strengths across the board to generate the earnings, cash flows and customer growth to “grow” into their multiples over time, a defensive trait lacking almost completely in many other new tech names. The fundamentals are in place, and it is far from a momentum story only for each of these core tech companies.



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