Ever since Jim Cramer coined the term, FANG stocks have been the must haves for investors looking for consistent, spectacular returns. Other watchwords have replaced the group consisting of Facebook FB, Amazon AMZN, Netflix NFLX and Alphabet GOOGL recently, most famously FAAMG. But these stocks continue to remain a quick way for investors, especially those focused on the tech arena to feel the pulse of the markets.
Most FANG members have continued to notch up robust gains in 2018 after a strong performance last year. One notable exception remains Facebook, which has gained only around 4.7% year to date. However, a closer examination of the stock’s fundamentals shows us that ultimately, it could be a better bet than all of its FANG peers in the near future.
Multiple Factors Arrest Facebook’s Ascent
Facebook has had a poor start to 2018 compared to its FANG peers. The stock is up only 4.7% year to date, marginally higher than the S&P 500. But only Alphabet’s performance is somewhat comparable, since Netflix and Amazon are up a whopping 67.4% and 36.7%, respectively over the same period.
A number of factors seem to be acting as a drag on Facebook’s stock at this point. Firstly, Facebook CEO Mark Zuckerberg announced at the beginning of the year that going forward users will likely see less content from businesses and publishers on the social networking platform’s News Feed. The initial investor concern seems to be centered on Zuckerberg’s assertion that the changes could mean users will spend less time on Facebook. (Read: Facebook Stock Dips on Major News Feed Overhaul)
Fresh concerns over the stock arose when Special Counsel Robert Mueller indicted several Russian individuals and groups for interfering with the 2016 U.S. elections, with the purchasing of ads on Facebook being one of the many illicit activities mentioned. Another lingering concern regarding Facebook is that user growth may have plateaued with monthly active users hitting 2.2 billion recently.
Cash Position, Advertising Potential Remain Big Positives
But Facebook is hardly a stock to ignore for two major reasons. Firstly, it continues to have nearly $42 billion as cash on its balance sheet. Quite like Microsoft MSFT or Intel INTC, Facebook could diversify into other lines of business once growth at is core operations flattens. Facebook could also use its cash on hand to make large dividend payouts, which is another positive.
Moreover, a recent eMarketer report claims that that the social media giant is expected to account for 11.3% of all U.S. advertising spending in 2019, passing the entire print category. With the average price per ad on Facebook rising 43% last quarter, and advertisers finding it increasingly hard to reach users via television and print, its advertising revenues can only climb higher. (Read: Despite Russia Woes, Facebook Stock Remains a Buy)
Least Pricey FANG Pick
But what makes Facebook a particularly compelling buy is its current valuation. While its FANG peers are clearly ahead on the price front, a close look at their PEG values shows us that they may have limited upside going forward. With PEG ratios of 6.06 and 3.97, Amazon and Netflix are significantly pricier than the S&P 500, which has a PEG ratio of 1.85.
Only Alphabet and Facebook appear undervalued on this count, with PEG ratios of 1.16 and 0.91 respectively. And Facebook is the clear favorite here with its Zacks Consensus Estimate for current year earnings increasing 11.1% over the last three months, compared to Alphabet’s 2.4% Moreover, Facebook is the only FANG stock to carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Facebook may have run into some trouble at the beginning of this year over changes to its news feed and the investigation over Russian involvement in the 2016 presidential elections. But its long-term growth prospects remain untarnished, buoyed by its strong cash potential and strong ad revenue potential. Moreover, it remains the least pricey FANG pick, making it a necessary addition to portfolios aiming for strong returns at a reasonable cost.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
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