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FAANGs See a Weak Start to 2019: More Pain Ahead for ETFs?

Sanghamitra Saha

The jinx of 2018 hasn’t broken for FAANG (Facebook, Apple, Amazon, Netflix and Google — now Alphabet) stocks, with the stocks posting an average loss of 2.2% in 2019, mainly led by Apple (AAPL) (read: Apple Tanks, Lowers Q4 Revenue Outlook: Tech ETFs in Focus).

Apple shares lost about 10% this year as it trimmed its fiscal first-quarter revenue guidance to $84 billion from $89-$93 billion. Facebook Inc. FB shed about 2.9%, Alphabet Inc. GOOGL is off about 2.8%, Amazon.com Inc. AMZN is down 2.5% and Netflix Inc. NFLX is up about 1.3% year to date (as of Jan 3, 2018).

Though all stocks did not do as bad, with Netflix (up 40%) and Amazon (up 28%) delivering pretty upbeat performances in 2018, Facebook (down 25%) and Apple (down 7%) were miserable. Alphabet (down 1%) also had no luck.

Facebook’s data debacle issues, fears of a slowdown in the demand for Apple’s iPhones, rising rate concerns, U.S.-China trade tensions and concerns about peaking growth in FAANGs are the major factors acting against the segment.

What Lies Ahead?

Let’s take a look at what waits these biggies in 2019. Global growth worries may weigh on this high-growth sector. Facebook will have to deal with continuing challenges to its user base in 2019.

 Amazon has been dealing with antitrust reviews, though in absence of any huge regulatory action, the stock should see smooth sailing on growing online shopping activities globally. Apple is reportedly struggling with iPhone demand issues and Netflix is utilizing cash at a record clip (read: Apple Woes Trigger Tech Sector Rout: ETFs Under Threat).

Fundamentals Look Moderate

The forward P/E ratio of Facebook is 18.4x versus 28.9x of the industry. Expected revenue growth for fiscal 2019 is 23.8% versus the 12.5% industry figure. Expected earnings growth is a negative 0.2% versus 11.2% growth expected for the industry.

Amazon’s expected revenue and earnings growth for fiscal 2019 is 20.5% (versus industry average of 15.2%) and 35.3% (versus industry average of 14.5%), respectively. Such huge earnings growth should place Amazon at an overvalued position (forward P/E of 79.0x) compared to the industry (24.4x).

The story is the same for Alphabet, which is undervalued at a P/E of 23.3x versus the industry-figure of 28.9x. Revenue growth for fiscal 2019 is 20.4% versus 12.5% industry average, while earnings growth is expected to be 4.7% versus 11.2% industry earnings growth.

Apple’s valuation is almost on par with the industry, with the forward P/E ratio at 12.0x versus 12.6x. However, its revenue and earnings growth projection for fiscal 2019 trail that of the industry.

Expected revenue and earnings growth for Netflix in fiscal 2019 is 25.7% (versus industry average of 10.4%) and 54.6% (versus industry average of 12.4%). However, the stock is still way overvalued at a forward P/E multiple of 101.8x versus industry average of 17.3x.

Mixed Industry Ranks

Google and Facebook belong to a bottom-ranked Zacks industry (bottom 43%) while Amazon belongs to a bottom 23% industry. However, Netflix comes from the top 18%, and Apple hails from the top 13%.

ETFs in Focus

If global growth slows down and rates in the United States do not go up, these high-flying tech names may stage a rebound. If not, these companies might falter, bringing pain for these ETFs.

Social media and Internet stock-heavy funds include Communication Services Select Sector SPDR Fund XLCGlobal X Social Media Index ETF SOCL and O’Shares Global Internet Giants ETF OGIG. Facebook and Google have exposure to these ETFs.

Tech ETF iShares U.S. Technology ETF IYW takes investors to Facebook, Apple and Alphabet. Facebook & Netflix-heavy ETFs are Invesco NASDAQ Internet ETF PNQI, First Trust Dow Jones Internet Index FDN and XLC.

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