In 2013, CNBC’s Jim Cramer memorably named four of the market’s best tech stocks the “FANG stocks.” The term was an acronym of their corporate names (at least at the time) and it stuck.
The name stuck in part because the four stocks continued to lead the bull market in tech. And what a bull market it was. From March 9, 2009 to Feb. 12, 2020, the tech-heavy NASDAQ Composite rose a staggering 674%. (That index technically entered a bear market in December 2018, falling 21%, but it recovered the losses in a matter of months.) That’s a compound annual return of just over 20% for nearly eleven full years.
But the FANG stocks did even better. One of the four wasn’t public in 2009. The other three gained 6,810%, 3,470%, and 940%, respectively, over the same stretch. In other words, they crushed the index at the same time that index was posting an unprecedented bull run.
Of course, over the past few weeks, the index and its components have tumbled amid wild trading. The NASDAQ Composite ended Friday down 20% from its Feb. 19 close. That’s with a 9.35% gain on Friday — which followed a 9.43% decline the day before.
The index’s largest stocks haven’t been immune to the selling, though it’s hard to say if they’ve led tech down, or been brought down with it. Either way, investors looking for direction in this wild market should look to its leaders. And so it’s worth examining where the FANG stocks sit heading into what could be another wild week.
Facebook (NASDAQ:FB) has seen one of the more surprising sell-offs in this market. Beginning Feb. 18, FB stock dropped 29% in just 17 trading sessions. That’s a decline that outpaced major market averages (including the NASDAQ) — which seems illogical.
After all, Facebook’s business doesn’t seem like it should be that cyclical. An economic recession driven by coronavirus fears presumably would lead some advertisers on Facebook platforms (which also include Instagram and WhatsApp) to cut back. Some small business customers might even go bankrupt.
But larger customers looking to cut costs might also increase their spending on Facebook platforms, hoping for better returns via more targeted advertising. Engagement, meanwhile, seems unlikely to be affected. If anything, traffic to Facebook’s namesake platform might be receiving a short-term bounce as users check in on family and friends.
Facebook also has a staggering amount of net cash. The company closed 2019 with $55 billion in cash, and no debt. So while the Facebook stock price dropped 29%, its enterprise value (defined as market capitalization less net cash) actually fell by 32%. More indebted companies who saw their stock prices drop 20% or 25% might have only lost 10% or 15% of their enterprise value.
And so this seems like an unjustified sell-off, as our Matt McCall wrote this week. Even after Friday’s bounce, FB stock — almost incredibly — trades at less than 16x the consensus earnings per share estimate for 2021.
But investors do need to keep an eye on the risks. Facebook’s spending isn’t slowing down, a key reason why the stock fell after fourth quarter results in late January. The namesake platform may start losing users, or at least seeing lower engagement. There’s a case that Facebook stock should have pulled back, even if it does seem like its decline went too far.
Amazon (NASDAQ:AMZN) stock now sits about where it traded for most of last year’s fourth quarter. Both bulls and bears might see that fact as supporting their respective cases.
After all, many investors thought AMZN was expensive, if not badly overvalued last year. This long has been the market’s most dearly-valued mega-cap stock, and skeptics have been waiting for the stock to crash for years. There no doubt are investors out there who believe the decline in AMZN, which is off 18% from last month’s highs, is only the beginning of a much-needed reckoning.
Bulls would claim that this looks like a much better company than it did just a few months ago, yet the stock price is roughly the same. Fears about the company’s launch of one-day shipping pressured the stock last year, as the higher costs pressured profits. But Amazon seemed to assuage those fears with a blowout fourth quarter report.
Q4 numbers crushed estimates for both revenue and profits. The new shipping policy brought in more sales which allowed Amazon to better leverage the extra costs. It suggested that Amazon’s relentless focus on satisfying customers would, as it has for years, satisfy the market as well.
The debate likely will continue. But it’s worth noting that this is now the third consecutive year in which Amazon’s market capitalization has cleared the $1 trillion mark. Each time the stock has pulled back in relatively short order, if for different reasons. AMZN looks attractive for the long haul, but in the near term it might need some help from the market.
For a while, it looked like Netflix (NASDAQ:NFLX) was bulletproof. Even into early March, NFLX stock was still trading above $380. Excluding a brief run past $400 in mid-2018, the stock was at all-time highs.
As market-wide declines accelerated, NFLX stock finally broke down, closing Friday at $336. Still, the news is hardly that bad. Shares still are up 1.3% so far this year. The NASDAQ Composite is off 12%. Streaming rival Disney (NYSE:DIS) has plunged 39%, though its theme park and cruise operations bear some of the responsibility.
The relative lack of exposure to market movements and macro concerns does make some sense. At this point, the intense debate over Netflix stock really has little to do with the broader economy.
It’s unlikely a recession is going to lead consumers to end their subscriptions. If anything, more cost-conscious consumers may accelerate their “cord-cutting” efforts. From a short-term standpoint, consumers now staying home may watch more Netflix or pick up a new subscription.
The debate over NFLX is as much about strategy as it is valuation. Is the company’s continually expanding content budget — about $15 billion in 2019, and guided to rise in 2020 — a wise investment for the future, or a sign that the business model simply can’t generate consistent free cash flow? Can Netflix hold off Disney, AT&T (NYSE:T), and Comcast (NASDAQ:CMCSA) as they join the streaming wars?
If Netflix’s strategy is on point, its stock is going to rise. The company will dominate streaming for decades, and print money as it leverages existing content. If not, the stock is overvalued — and possibly badly so.
It will take years for the battle over NFLX to be decided. It appears, unsurprisingly, that external factors haven’t shaped the debate all that much.
Alphabet (GOOG) (GOOGL)
When Cramer first used the term “FANG stocks” in 2013, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) was still known as Google. To many investors, it still is (and, besides, “FANA stocks” doesn’t have quite the same ring to it).
As with Facebook, the sell-off in GOOG stock is somewhat surprising for much the same reasons. Alphabet has an even larger cash pile: $109 billion at the end of 2019, against just $4 billion in debt. Its online advertising business too presumably could take share from off-line rivals in a recession. Its “Other Bets,” most notably self-driving startup Waymo and life sciences organization Verily, have seemingly little macro exposure.
Alphabet stock is more expensive than Facebook, at a little less than 20x forward earnings. But the downside risk here seems potentially more limited. The online advertising business does have its challenges, including some level of margin compression in recent years. Consumers can leave Facebook over time in a way that they likely won’t Google, even as Microsoft (NASDAQ:MSFT) tries to take market share with its Bing search engine.
That said, Alphabet stock still trades above where it did as recently as August. Investors have been cautious toward the name even in a more bullish market environment. If investors jump back into U.S. stocks, GOOG no doubt gets a bounce. But to get back to outperformance, Alphabet probably needs a catalyst. Aside from a first quarter earnings beat next month, it’s tough to see where that catalyst comes from.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.