Well, it finally happened.
The unstoppable machine that is Netflix (NASDAQ:NFLX) finally hit a road-bump. The company added fewer subscribers than expected in the second quarter. That caused NFLX stock, which was up more than 100% year-to-date heading into the report, to drop in a big way.
The disappointing second quarter report is also causing collateral damage in other names. Particularly, FANG stocks are having trouble making solid gains after Netflix’s ugly report.
Does that make sense? Is FANG really that connected? Does weakness in Netflix equal weakness in Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG)?
No. No. And no.
As such, I’m buying the other FANG stocks on any Netflix-related weakness and ahead of what I expect to be some blowout earnings reports.
Here’s a deeper look.
Netflix Weakness Doesn’t Equal FANG Weakness
The Netflix report was ugly because the company added only 5.2 million subscribers in the quarter, versus a guide for 6.2 million net adds. Netflix missing on its own guide for net adds is a rarity. Indeed, it has only happened twice before over the past two years (first quarter of 2017 and the second quarter of 2016).
But each time it did happen, Netflix’s weakness didn’t show up anywhere in the other FANG reports.
Let’s look at the first quarter of 2017. Netflix added just 5 million subscribers, versus a guide for 5.2 million. Also in the first quarter of 2017, Amazon, Google and Facebook all reported very strong double-beat quarters.
The second quarter of 2016 is more of the same. Netflix was weak, adding just 1.7 million subscribers against a 2.5 million guide. But the rest of FANG was strong. Amazon, Google and Facebook all reported very strong double-beat quarters.
Therefore, it is pretty clear that Netflix weakness does not equal FANG weakness. Instead, whenever Netflix has been weak over the past two years, the other FANG names have actually been quite strong.
From this perspective, history is saying buy all and any Netflix-related dips in the other FANG stocks.
The Rest of FANG Could Have Some Blowout Reports
History isn’t the only thing saying buy the other FANG stocks on Netflix-related weakness and ahead of their earnings reports. The fundamentals are saying buy FANG, too.
If you look at Facebook, all signs point to that company reporting a really good quarter. Instagram has been on fire, crossing the billion-user mark recently, while Instagram Stories is now double the size of Snap (NYSE:SNAP). IGTV also just rolled out. Plus, I’m starting to see ads on Messenger and in Marketplace, meaning that the quarterly financials could get a big boost from more ad real estate.
Overall, I think Facebook will report a very, very strong quarter behind successful ad monetization efforts.
When it comes to Amazon, the story of this company taking over the retail and cloud marketplaces remains intact. On the retail side of things, Amazon’s website crashed early on during Prime Day, a surefire sign that traffic volumes were overwhelmingly high (that is a good thing for the retail business). On the cloud side of things, Microsoft (NASDAQ:MSFT) is doing really well, but Amazon remains king.
Overall, I also think that Amazon will report a very strong quarter behind continued AWS and retail strength.
On the Google side of things, business operations appear healthy as normal. Regulation concerns are now largely in the rear-view window, and digital ad spend has likely reaccelerated to new highs. Google is also making big moves in the commerce world, launching Shopping Actions and a new retail ad tool with Shopify (NYSE:SHOP).
Put it all together, and I think Google’s quarter will be good, too.
In the big picture, then, I think this quarter will be a repeat of 1Q17 and 2Q16, when Netflix missed subscriber estimates but the other FANG names reported very strong numbers. Thus, ahead of those reports, I would buy FANG stocks on Netflix-related weakness.
Bottom Line on FANG Stocks
Don’t listen to the pundits. FANG is not dead. Instead, FANG remains the gold standard for healthy and sustainable growth, and the FANG stocks will continue to lead this market higher.
Netflix was weak this quarter, yes. But the other times Netflix has been weak, the other FANG names have been strong. I expect more of the same this quarter, and as such, I am buying Facebook, Amazon and Google on Netflix-related weakness.
As of this writing, Luke Lango was long FB, AMZN, GOOGL, SNAP and SHOP.
