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Is FAANG Losing Its Allure?

Daniel Laboe

FAANG has lost some of its allure over the past 52-weeks. FAANG’s almost decade long rally is hitting a plateau, with all but one of these stocks demonstrating negative returns since last August. Over the last 52-weeks Netflix NFLX is down 21.2%, Amazon AMZN has slid 8.7%, Apple AAPL is down 6.5%, and Alphabet GOOGL fell 5.9%. All underperforming the S&P 500, which has only fallen 2% since the end of last August. Facebook FB is the only one of them that has shown investors positive 12-month results, up 3.5%.

Why have the treasured FAANG stocks been lagging in recent months of trading? Has the growth stopped, is this just function of valuation or can the recent soft performance be understood on an individual basis?

You can see that FAANG stocks haven’t been tracking as closely with each other in the recent months as each firm faces its own issues. It’s time to start looking at these firms on an entity to entity basis.

Below are some of the FAANG stocks that I believe have lost their luster as an attractive investment.

Netflix (NFLX)

Netflix has been FAANGs worst performer both over the last 12-month and year-to-day. Though, over the last decade, NFLX has returned investors more than any other FAANG member. Its place in FAANG may be on shaky grounds with deceleration provoking concern.

Netflix is the pioneer of the subscription streaming space, with its subscription-based business model being adopted by companies across the board. It was the first to market, but was swiftly followed by steep competition. It has been able to remain the clear leader in the space, but the increasing saturation is beginning to take a toll.

NFLX is and has been trading at a forward P/E of 60x, the highest valuation in the exalted FAANG. NFLX’s valuations have fallen significantly in the last few months as user growth decelerates faster than anticipated. 60x P/E is the lowest multiple that Netflix shares have ever traded at but does that mean it’s a value buy?

Netflix just reported a decline in domestic subscriptions and a significant slowdown in international subscription growth. This slowdown is occurring even before Disney+’s release, which is expected in November. Disney+ is anticipated to be a significant competitor, especially in the international markets where its brand is widely recognized and distinguished.

The international market is Netflix’s final frontier of growth, and if it starts losing share to Disney NFLX’s valuation could tumble much further.

NFLX is down over 21% since it released its Q2 earnings in mid-July. I expect that these shares have more room to fall if Disney+ gains as much traction as anticipated.

Apple (AAPL)

The decline in smartphone sales combined with trade headwinds has been taking a toll on Apple’s financials. The iPhone has been the firm’s most significant revenue driver, but this is beginning to change. This past quarter was the first time that Apple’s iPhone revenue made up less than 50% of its total revenue for at least 5 years.

Apple’s top and bottom-line have both taken a hit this year while margins continue to decline. Having to rely on new products and continued improvements to drive sales isn’t sustainable, especially when you are in as competitive a space as Apple is. The company is going to need a more consistent revenue driver if they want to become the US's most valuable company once again.

AAPL shares have been driven up by the firm’s excessive stock buyback program. Apple bought back roughly $42 billion of its stock in the first half of 2019, with no other company coming close to this level. With fewer shares outstanding, the value of each share goes up. This is not a sustainable strategy for share price appreciation.

Apple is ramping up inventory for its releases of the iPhone 11 in September. The question is whether this new update will be enough to propel iPhone sales back into growth? According to a recent leak, it appears that the only real improvement is going to be its camera capabilities. Apple is running out of improvement ideas and is waiting for their 5G release (expected in 2020) to give consumers a strong incentive to upgrade their handset devices.

Apple is trading at 16x forward P/E, one of the highest multiples this stock has seen in almost a decade. Apple's recurring service revenue like Apple Pay and Apple Music are partially driving these multiples higher. Recurring and subscription-based revenue has been driving valuations up in the tech sector in recent years.

Services still only make up less than 15% of the firm’s total topline, and the reliance on iPhone sales is still very apparent. I don’t believe that Apple’s current valuation is justified. The China-US trade war is negatively impacting not only Apple’s supply chain but also its customer base. The trade war has given the Chinese a renewed sense of nationalism and driven preference to domestically made products.

Take Away

FAANG has begun to show cracks as 4 out of its five members have illustrated negative returns over the past 52-weeks as well as underperforming the broader market. Funds are beginning to limit their exposure to these once potent stocks as they brace themselves for an ostensible downturn.

Netflix has performed admirably over the past decade, but I don’t believe that its current valuation is fair considering the increasingly saturated market it is competing in and faster than expected deceleration in subscription growth.

Apple’s reliance on iPhone sales as its primary revenue driver exposes the firm to substantial risk when marginal improvements aren’t successfully driving growth. If the company is able to successfully grow its recurring revenue streams with Apple Pay, licensing, and other services the firm could still have bright future.

 

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