Amazon.com, Inc. (NASDAQ:AMZN) has been on a tear, with Amazon stock price up more than 35% so far in 2018. However, it’s not the best-performing FANG stock, which has me wondering, what is the best FANG stock for investors to own?
Aside from Amazon, FANG of course refers to Facebook Inc. (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Netflix, Inc. (NASDAQ:NFLX). Sometimes, investors stretch it out to FAANG and throw in Apple Inc. (NASDAQ:AAPL).
We already know why Amazon stock price keeps going up: The company continues to grow in all of its end markets. There’s robust growth in Amazon Web Services and the secular trend in online shopping is doing anything but slowing.
Integrating with Whole Foods can give AMZN the physical retail presence that it needs and Prime gives the company high-margin cash flow in the $10+ billion range.
FAANG vs. the Market
The reasoning behind owning FANG or FAANG is pretty simple: buying high-quality companies that can outperform the market. When the phrase was coined a few years ago, AMZN, FB, AAPL, NFLX and GOOGL were big. But there weren’t this big.
Amazon and Alphabet have a more than $750 billion market cap, Apple is knocking on $1 trillion and Netflix just overtook Walt Disney Co (NYSE:DIS) as the largest media company.
The biggest gripe against FANG is usually valuation. Apple has a reasonable valuation and even FB and GOOGL have justifiable multiples. It’s once you get to Amazon and NFLX that the valuation become iffy.
We recently looked at why these “traditional” metrics don’t work for Amazon. Some may say that’s just an excuse to justify an expensive stock. But hey, AMZN wasn’t cheap 10 years ago when it had a $35 billion market cap. It’s still not cheap today with its $755 billion market cap. That didn’t stop its historical run over the past decade.
If I had to nitpick just one though, it would be Netflix. At a $150 billion market cap, NFLX is trading at roughly 10 times this year’s sales and it expects to spend about $8 billion on content. I understand boosting the library, but at 50% of its this year’s revenue, it’s a big free-cash flow burner even if the Street is willing to overlook it.
Still, its 82% year-to-date rally has bolstered many investors’ returns. For its part, AMZN has been no slouch either, up a whopping 37%. GOOGL and FB have been the worst performers, up just 3% and 5%, respectively.
An equal allocation in FANG or FAANG would crush the Nasdaq’s 8.8% rally this year and that’s why it’s so hard to pick just one.
Trading Amazon Stock Price
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Amazon stock price is behaving very similarly to the Netflix, the latter of which recently broke through resistance and hit new highs. Perhaps a rally in Amazon stock price is next.
A look at the charts shows current resistance between $1,600 and $1,625, with a recent high just under $1,650. Should the markets hold up, I would expect AMZN stock to rally to new all-time highs.
In the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), AMZN is the second-largest holding (at 10%), trailing only AAPL (at 11%). So if the broader market comes under pressure, fair or not, it will likely weigh on Amazon stock price too. Should that happen, look for minor support at $1,550 and strong support between $1,450 and $1,500.
So Is Amazon the Best FANG?
When it comes to FANG, investors could avoid the “expensive ones” and buy the “cheap ones.” But had they done that, they missed out on the explosive rallies of AMZN and NFLX and underperformed with GOOGL and FB. That’s why it’s so hard to just one and it’s why the basket approach works so well.
It allows investors to diversify, while giving themselves the opportunity to participate in big upside. Although admittedly, investors should use some caution looking to get long at this very moment.
It’s much like video game stocks, Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc (NASDAQ:EA) and Take-Two Interactive Software, Inc (NASDAQ:TTWO) or chip stocks, like Nvidia Corporation (NASDAQ:NVDA), Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD).
At any given moment, there’s one big winner. But held collectively over a longer time frame and the groups tend to outperform thanks to strong secular industry trends. FANG is no different.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL, GOOGL and NVDA.
