Alphabet Inc (GOOG, GOOGL), Facebook Inc (FB) and Amazon.com, Inc. (AMZN) are most certainly on a different level when it comes to big tech.
These are the fastest growing companies of the sector; they are all market favorites; and each is among the world’s most valuable companies.
While each of these companies is undeniably great, showcasing impressive past growth with bullish long-term outlooks, there is one big reason why FB, GOOGL, and AMZN stock should no longer be owned.
What’s the Reason?
Ultimately, the goal of investing is to cash out with far more money than you started with. You want to make investments with the potential to appreciate significantly over the course of many years. However, when we look at the operations versus the valuations of Google, Facebook and Amazon, it is hard to make a case that GOOGL, FB and AMZN stock could have 30% upside in the foreseeable future.
In other words, each stock looks like a dead money investment for quite some time to come.
With that said, Warren Buffet did not become one of the world’s richest men by investing in companies that had very little long-term upside. Thus, it is not wise to invest in companies that lack upside, or have market capitalizations that value the underlying business many years out into the future.
Granted, many look at AMZN, FB, and GOOGL stock as equities that do have long-term upside potential. However, look at their multiples. AMZN is trading at 72 times forward earnings, with GOOGL at 18x and FB at 26x.
I recently wrote an article that showcased nine stocks that were trading at such cheap multiples, that each could jump 30% from their current levels and still be cheap versus the underlying business after. The same cannot be said about AMZN, GOOGL or FB stock.
There’s Not Much Upside for FB, AMZN and GOOGL
In retrospect, Facebook, Google, and Amazon are already very expensive. And investors have to ask, how much upside is there really in these stocks?
If GOOGL stock jumps 30%, it is a $940 stock with a market capitalization of $630 billion. While that may sound attainable, it would make GOOGL the largest company in the world by a mile. GOOGL stock would be $100 billion more valuable than Apple Inc. (AAPL), despite AAPL currently having over $100 billion more annual revenue and three times as much free cash flow.
While GOOGL stock is awarded a growth premium, it’s important to realize that Alphabet’s growth has fallen to the mid-teens from over 20%, and its year-over-year growth is expected to keep shrinking as it grows larger. Hence, 30% upside is unwarranted, and should not be considered realistic in a person’s fundamentally driven analysis.
The same argument applies to both FB and AMZN stock — a 30% increase cannot be validated with the underlying business of each company. It would value each company at $430 billion!
If that were to happen, AMZN stock would be more valuable than Alibaba Group Holding Ltd (BABA) and Wal-Mart Stores, Inc. (WMT) are combined, two companies that are significantly larger. And for FB stock, it would assume that Facebook hits the ball out of the park with WhatsApp and Oculus, and can maintain 35% growth for at least five years.
While possible, that’s five years out in an industry that changes by the month.
Let’s not forget that Facebook’s underlying business is not that large relative to its valuation. It’s expected to have $26 billion in revenue this year, and it needs 45% growth to get there. When you consider this fact, it’s quite crazy that we are talking about FB stock supporting a $430 billion market capitalization.
There Are Better Places to Put Money
Fact is that FB, GOOGL and AMZN stock have captured the imagination and wallet of investors, but each stock is nearing a peak. That’s why it seems more logical to put money in stocks like AAPL, stocks that could jump 30% and still trade at just 13x earnings. While it does not have the growth of FB, GOOGL or AMZN, investors must remember that eventually, growth slows and even stops for all companies.
Therefore, I’d much rather own a company like Apple at a cheap multiple with big product launches later this year, and a high likelihood of significant top line growth in 2017 when its performance is being compared to 2016.
It makes more sense than owning stocks with little upside that have a long ways to fall if and when growth starts to decelerate, or no longer meets bullish expectations.
As of this writing, Brian Nichols owns shares of AAPL.
