5 Reasons Reeling FAANG Stocks Won’t Deliver Big Returns

Investors who want a meaningful return in 2019 should avoid the FANG stocks

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The FAANG stocks — Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOG, NASDAQ:GOOGL) — have definitely lost the tremendous momentum they had for much of this decade. These big tech stocks are showing increasing weakness.

After the five companies reported their fourth-quarter results, it’s clear that they are all, much as I predicted a year ago, facing tough headwinds. Steepening competition is weighing on the group. All of the FAANG names except for Apple stock are being hurt by their increased spending, while investors are justifiably worried about Apple’s lack of innovation.

Finally, concerns about government intervention are helping to keep a lid on FB and AMZN.

Although all of the FAANG names are obviously tremendously successful, revolutionary companies, and they all generate large amounts of revenue, their problems will probably prevent their stocks from eclipsing last year’s highs until at least 2020. Therefore, investors who are looking for large returns in 2019 should sell these tech stocks.

Tech Stocks in trouble: Facebook (FB)
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Facebook (FB)

Facebook’s headline Q4 numbers appeared to be great, but a closer look shows that they weren’t so stupendous. Still weighed down by the company’s tremendous spending on security, Facebook only increased its income from operations 6% year-over-year, while its operating margin dropped from 57% to 46%. The company’s headline bottom line, which surged 61% year-over-year, looked impressive largely because of its much lower tax bill.

And although Facebook’s revenue jumped an impressive 30% year-over-year, that represented a decline from the 33% YOY jump that the company reported in Q3 Perhaps the increased competition from Amazon and Snap (NYSE:SNAP) for digital ad dollars are taking a toll on Facebook’s growth.

FB stock hasn’t made tremendous strides when it comes to improving its monetizaton and user experience recently. As I’ve noted previously, the company has been too consumed with improving its security to make much progress on other fronts. Even Zuckerberg basically conceded that point on the company’s Q4 conference call, saying, “But the reality is, we’ve put most of our energy into security over the past 18 months, so that building new experiences wasn’t the priority over that period.”

Meanwhile, the company is constantly beset by new scandals and the threat of government regulation. Recently, for example, Apple banned one of Facebook’s apps that FB allegedly “used to draw in all of a user’s mobile data,” according to Seeking Alpha. German regulators are about to rule on the legality of the company’s data collection, and the company is being probed by multiple states.

With Facebook’s growth slowing, its operating margin shrinking and the company facing constant controversies and probes, it will be a while before Facebook stock hits the high it set in the middle of last year.

Tech Stocks: Amazon (AMZN)
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Amazon (AMZN)

Amazon expects its first-quarter revenue to rise just 10%-18% year-over-year, perhaps indicating that it’s being hurt by competition from WalMart (NYSE:WMT) and other retailers that are stepping up their e-commerce games.

Meanwhile, Amazon is still losing money on its overseas e-commerce business. Given the high valuation of Amazon stock, investors appear to have priced in an acceleration of the e-commerce business’ revenue and profitability of the overseas e-commerce business. If Amazon fails to achieve those milestones within the next year, AMZN stock could very well take a big hit.

The company is stepping up its spending on marketing and employees as it tries to enter many new markets. Specifically, its spending on marketing rose 1.1 percentage points year-over-year in Q4, and it had 14% more employees last quarter than in the same period a year earlier.

InvestorPlace’s Ian Bezek recently described how AMZN stock could be badly hurt by the erosion of the company’s Prime moat due to emerging competition. Additionally, there’s a good chance that the U.S. Postal Service will raise the price it charges Amazon, meaningfully affecting the company’s profitability and hurting Amazon stock.

Tech Stocks: Apple (AAPL)
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Apple (AAPL)

As has been well documented by myself and others, Apple stock has already taken a big hit due to intensified competition from Chinese companies, though Apple’s lack of meaningful innovation hasn’t helped.

The results of Apple’s December quarter were in line with its negative preannouncement and featured a very troublesome year-over-year overall revenue decline of 5%. Revenue from iPhones tumbled 15% YOY. Despite primarily blaming the decline on China, AAPL noted in its Q4 conference call that overall iPhone upgrades were lower than it had anticipated.

Importantly, the midpoint of the giant’s top-line guidance for its current quarter came in at $57 billion, versus the then-consensus estimate of $59 billion.

In addition to intensified competition from Chinese companies in the smartphone market, Apple stock, as I’ve noted in the past, could be negatively affected by the rejuvenation of Fitbit’s (NASDAQ:FIT) smartwatch business and by the trend of companies finding ways of avoiding Apple’s fee on app subscriptions sold on iTunes.

Although Apple stock has rebounded slightly since the company’s results produced a relief rally, the shares are still down 25% from their 52-week high. Apple stock probably won’t approach that high anytime soon.

Tech Stocks: Netflix (NFLX)
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Netflix (NFLX)

Netflix’s year-over-year revenue growth slowed in the fourth quarter, falling to 27% from 34% in Q3 and 40% in Q2. But it’s the company’s sky-high spending that should really worry the owners of Netflix stock. Largely due to the huge amount it spends on producing content, its net cash used in operating activities came in at $1.235 billion, up from $690 million in Q3, while its free cash flow sank to -$1.31 billion from -$859 million.

By contrast its Q4 “operating income” (which appears to exclude the amount it spends on content) was only $216 million. While the company’s recent price hike will help its finances somewhat, it’s not going to come close to solving the problem; as its operating income is only expected to rise to $400 million this quarter.

Moreover, the price hike isn’t going to help Netflix’s battle against its emerging competitors in the streaming space. Disney’s (NYSE:DIS) ESPN+, which recently announced that it has 2 million subscribers, Dish’s (NASDAQ:DISH) Sling TV, which had 2.4 million subscribers as of November 2018, Hulu, with 25 million subscribers, YouTubeTV, Roku (NASDAQ:ROKU), and Plex are among the other services competing for streaming TV dollars.

In similar fashion to Amazon stock, the valuation of Netflix stock, which has a forward price-earnings ratio of 51 and a price-sales ratio of 9.5, is sky-high because investors expect ts revenue and profit to skyrocket. If Netflix continues to rapidly burn cash, at some point soon investors will start to sell Netflix stock in favor of companies that are making money.

Tech Stocks: Google (GOOG, GOOGL)
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Google (GOOG, GOOGL)

Like its FAANG colleagues, Google stock is facing concerns about tougher competition and higher costs. Particularly threatening to GOOGL stock is Amazon’s increasing emphasis on paid ads, since Amazon also offers access to ready-to-buy consumers but has much more data on the people browsing its website than Google.

On a positive note for GOOG, it does not yet appear to have been seriously negatively affected by the competition. As its Q4 top and bottom lines came in ahead of analysts’ consensus expectations and its top line increased 22% year-over-year, up from a 21% gain in Q3.

However, its operating income came in at $8.2 billion, well below the consensus outlook of $8.61 billion. Its operating income also declined sequentially in Q4 from $8.3 billion in Q3, even though Q4 is usually much stronger than Q3 for consumer-oriented companies. Its operating margin dropped to 21% in Q4 from 24% during the same period a year earlier.

The main driver of the operating income and gross margin declines appears to have been a 27% YOY jump in operating expenses. Increases in headcount appear to have been the largest driver of the opex jump.

For those who must buy one of the FAANG stocks, I’d advise choosing Google stock. It’s much more profitable than Netflix and Amazon; its revenue growth appears to be stable, unlike Facebook and Apple; it’s facing less competition than Netflix, Apple and Amazon; it appears to be in less trouble with regulators and has a much better image than Facebook. Finally, unlike Apple, Google stock looks poised to benefit meaningfully from a huge, new revenue driver in a few years i.e. its driverless-car initiative.

As of this writing, Larry Ramer owned shares of Fitbit.


Article printed from InvestorPlace Media, https://investorplace.com/2019/02/5-reasons-reeling-faang-tech-stocks-wont-deliver-big-returns/.

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