Australia | Sep 16 2016
Global equities fund manager AtlasTrend argues the case for investment in some, but not all, of Facebook, Amazon, Netflix and Google.
Which FANG shares should you invest your money in?
In early May this year, we published an article for AtlasTrend’s members called “Top 3 Reasons for Owning the World’s Most Famous Technology Stocks” (click here to read the article). In that article we outlined exactly why we owned three out of four so called FANG stocks in our thematic managed funds.
The term FANG stocks is commonly used to refer to some of the world’s leading technology companies being Facebook, Amazon, Netflix and Google (or Alphabet which is Google’s official stock trading name). Together, these 4 companies have a combined market capitalisation equal to the entire Australian share market.
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Since that detailed article was published, all 4 FANG stocks have increased in price by 7.5% to 15.5% in just over 4 months in US$ terms. The Australian dollar versus the US$ has not changed over that period, so an Australian investor would have made the same returns in AU$ terms.
So are any of the FANG stocks still a buy following their recent strong share price performance? The simple answer is yes to Facebook, Amazon and Google and no to Netflix. Let’s find out why.
Facebook – Nearly Unstoppable
Would it surprise you that over the last 5 years Facebook has added on average 200 million active users globally per annum?
Let’s put that into perspective. 200 million people is equal to nearly 9 times Australia’s entire population who become new Facebook users every year. This astonishing user growth is one of primary drivers of Facebook’s rapid revenue and earnings growth.
With a total of 1.7 billion users, Facebook now has one of the largest audiences for advertisers to target. In the most recent quarter (Q2 FY2016), the company generated US$6.2 billion of advertising revenue, an increase of 63% compared to the prior comparable quarter in 2015. On a revenue per user basis, this metric increased by 42%. Over the same quarterly period, the company delivered US$2.8 billion of net income, nearly doubling the net income it made in Q2 FY2015.
The earnings equation for Facebook remains relatively simple. As it adds more users, it becomes even more attractive to advertisers, who then spend more money advertising on Facebook. The company’s recent financial results clearly prove this is happening. Currently trading at 25x FY2017 P/E with 29% forecast earnings growth, Facebook continues to be a very attractive investment.
Amazon – Crossroads of Online Shopping and Big Data
Amazon is one of those unique companies that is exposed to both the rapid growth in online e-commerce and also the exponential growth in data generation globally. With its 270 million active customer accounts, Amazon knows a tremendous amount about its customers. This provides the company with a key competitive advantage versus other retailers through the use of big data customer analytics.
The company has also cleverly leveraged its big data knowledge to build the Amazon Web Service business which provides commercial cloud computing and analytics services. This division is already becoming a future earnings powerhouse for Amazon.
Are Amazon shares really expensive?
Let’s have a look at the company’s earnings profile first. For many years Amazon has been focused on growing revenues as fast as possible given the huge potential market up for grabs. This often led to meagre levels of profits but this has started to change. For example, during Q2 FY2016, Amazon made operating income of US$1.3 billion, approximately 3 times what it generated in Q2 FY2015. It is now starting to prove to the market that it is able to generate growing margin from its huge revenue base (e.g. US$107 billion revenue in FY2015).
Trading at 46.7x FY2017 P/E, Amazon is not cheap on a traditional valuation metric. However, the company’s proven track record of very high revenue growth plus its recent ability to start making meaningful earnings shows there is great potential for the share price to keep climbing higher. If you are a strong believer in the growth of online shopping or big data over the next decade, then Amazon should be an investment in your portfolio.
Netflix – No Thanks
Netflix is the online media streaming service that has gained popularity in the US and a number of other countries including Australia. Subscribers pay a fixed monthly fee for unlimited streaming access to a large amount of TV shows and movies. The more subscribers Netflix has, the more money the company makes.
Sounds simple right?
When we last wrote about Netflix a few months ago, one of our main concerns was the slowing growth of its subscriber base. This was again confirmed when Netflix reported that in Q2 2016 net new subscribers increased by only 1.7 million to 83 million. This net increase was below the company’s own forecast (of 2.5 million) and worryingly was nearly half the amount of net subscriber increase compared to a year ago. In its key US market, the company increased total subscriber numbers during Q2 2016 by only 0.3%.
Astonishingly, Netflix currently trades at a FY2017 price-to-earnings ratio (P/E) of 88.2x. The company’s recent slow subscriber growth numbers simply can’t come close to justifying this incredibly expensive valuation. After all, a number of other technology companies (including FANG stocks) trade at much cheaper valuations with better growth profiles.
Google – Online Search plus The Next Big Thing
Google is the behemoth among the FANG stocks with a market capitalisation of A$706 billion. To put that in context, it’s market value is larger than the combined values of Australia’s top 10 listed companies by size.
Google has grown successfully to this size through its near monopoly of the online search advertising market where it has a 70% market share. The substantial majority of the company’s revenues are from this core business which continues to grow strongly. In Q2 2016, Google’s core business reported US$21 billion of revenue and US$7 billion of operating income, an increase of over 20% compared to Q2 2015. That is quite an achievement for a company the size of Google.
The strong performance of Google’s core business alone justifies the company’s current trading valuation of 19.6x FY2017 P/E. However, shareholders in Google also get the added benefit of the company’s investments in what it terms “Other Bets”. This is the division of the company that develops completely new technologies that may have far reaching benefits for millions or even billions of people worldwide. It includes technologies such as self-driving cars and biotechnology to increase human lifespan.
Do the “Other Bets” relate directly to Google’s core online search advertising business?
Not really but that is the beauty of Google’s thinking. The company is using a portion of the tremendous cash it generates from its core business to fund new technologies that may eventually result in tremendous benefits for society and of course financial benefits for Google’s shareholders. Even if only a small number of these “moonshot” projects turn out to be commercial successes, Google’s share price will no doubt rise even more.
Despite Google’s recent share price rise, the shares still represent a highly attractive investment particularly if you believe in Google’s innovation led business model.
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AtlasTrend is a global equities fund manager that makes it easy for anyone to invest in the world’s most thriving trends. The team brings a wealth of investment insights and access to smart and hassle-free global investing through an engaging and fully transparent online investment platform. To gain more actionable investment insights from the AtlasTrend team on profitable world trends (such as the growth of online shopping or rise of big data) and the listed international companies benefitting from these trends, register today for a free trial at www.atlastrend.com.
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