There is an old Wall Street adage that the first trading day of the year foreshadows the first trading month and the first trading month foreshadows the year. If there is any truth to that nugget, the FANG stocks — Facebook Inc (NASDAQ:FB) stock, Amazon.com, Inc. (NASDAQ:AMZN) stock, Netflix, Inc. (NASDAQ:NFLX) stock and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stock – look likely to be left in the dust by other tech stocks this year.
With the exception of Netflix, which managed a 4.75% jump, none of the FANG stocks rose more than 2.8% yesterday. And that was on a day when the tech-heavy Nasdaq exchange jumped 1.5% and many tech stocks rose 5% or more.
The rally in Netflix stock was probably largely due to speculation about a potential takeover by Apple Inc. (NASDAQ:AAPL). But the iPhone maker has never been one for huge takeovers and will probably wait until it is in a much larger hole than it is now before making a huge deal, so the rally in Netflix stock will probably fade soon.
Problems For the FANG Stocks
Meanwhile, the FANG stocks as a group are facing a few challenges.
All four of the names ran up significantly in 2017, leaving them with valuations that can’t be described as cheap, although the valuations of Netflix stock and Facebook stock are stratospheric, while Google stock isn’t at nosebleed levels but isn’t very attractive either.
Furthermore, a large part of the reason for the FANG stock rally was probably anticipation of the tax reform law which significantly lowered the tax obligations of large corporations and enabled multinationals like the FANG names to repatriate some of their overseas earnings at a low tax rate. The law has now been signed, and the benefits from it are priced into the FANG names.
Another major reason for the FANG stock rally was investors’ persistent belief that every other advanced economy in the world was way behind the economy of the U.S., where, of course, all four of the FANG names are based and generate a large amount of their earnings.
But China and the EU have both survived their challenges which were once perceived by many to be insurmountable, and recent data indicates that both of those regions are actually thriving. Consequently, Chinese tech stocks (think Weibo Corp (ADR) (NASDAQ:WB) and Alibaba Group Holding Ltd (NYSE:BABA)) and multinational stocks with high exposure to Europe (think McDonald’s Corporation (NYSE:MCD) and Volkswagen AG (OTCMKTS:VLKAY)) are likely to attract much more cash from large investors in 2018 than in 2017, taking money away from the FANG stocks.
Additionally, many new technologies, including artificial intelligence, drones, 3D printing, Internet of Things and virtual reality are really coming into their own for the first time in 2018 and are likely to take some money and excitement away from FANG stocks.
Finally, each of the FANG names are facing tough headwinds going forward. Facebook is coping with a significant challenge from Snap Inc (NYSE:SNAP) that is likely to weigh on Facebook stock.
Netflix is facing a looming challenge from Walt Disney Co (NYSE:DIS), and Amazon stock will be hurt by the fallout from the hostility of President Donald Trump, as well as increased challenges from Wal-Mart Stores, Inc (NYSE:WMT) and other large retailers that are stepping up their e-commerce games.
Finally, Google stock is probably the best of the bunch, given its reasonable valuation and search moat, but GOOG stock will be limited by increased competition from Amazon and ever increasing competition for ad dollars from social media websites.
All four of these companies are likely to rise in 2018, but this year many other tech names are going to do better than the FANG stocks. If 2017 was the year of the FANG stocks, 2018 will be the year of smaller and foreign tech names.
As of this writing, Larry Ramer owned shares of Weibo.
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