Decoding the Optimism Surrounding FANG Stocks The FANG stocks are highly valued tech stocks fueled by consumer perception and investor optimism. So should you have a bite of them?
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In stock trading and investing, you can’t help but flow along with the general investor opinion. But analysts look beyond the prevailing trend to uncover hidden opportunities and factors investors might have missed out on. In many cases though, investor optimism could be right since there obviously is something they see that is crucial. What Are the FANG Stocks? If you haven’t heard already, the FANG stocks are a collection of some very important tech stocks. They are the game changers, though a conventional fundamental valuation would place some of these stocks in overvalued category. So what do analysts say in terms of investing in these stocks? FANG stocks began with Facebook ($FB), Amazon ($AMZN), Netflix ($NFLX) and Google’s parent company Alphabet ($GOOGL). That’s how the FANG acronym came about. But later this group expanded to include Apple ($AAPL), Microsoft ($MSFT) and Nvidia ($NVDA). Some have also been using transformed acronyms to refer to this group, such as FAANGs or FAAMGs. But the original acronym is still the one that’s most popular. www.tradezero.co
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What’s All the Optimism About? Kiplinger analyst Michael Kahn gives his take on the optimism surrounding FANG stocks. A lot has to do with the perception of the people – what people think about these companies, the state of the economy and the financial circumstances they are experiencing individually. This has a huge bearing on the stock market. Though a profitable company usually sees its stock perform well, the value of a stock increases not necessarily as a result of the company earning more but because of investors’ belief that it stands to earn more. That fuels optimism and raises stock value, and that shows in the FANG stocks. Most of the stocks that are part of the FANG have valuations that exceed the market average. Amazon is an example. Its P/E is 305 on the basis of its earnings through the past 12 months. Contrast that with the S&P 500 index that only has an average P/E in the region of 25. But considering the analyst estimates of the earnings next year, Amazon has a ratio of 150, which is still significantly higher than the average P/E. For sure Amazon is a reputable company that keeps innovating, but still it is steep to consider that Amazon’s future cash flows www.tradezero.co
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could be nearly 11 times more than the average of some of the major blue-chip companies. As we said before, with traditional valuation metricsyou’d come to such a conclusion. There Are Justifying Factors for the Optimism But analysts looking from a different perspective, such as Palash Mishra of business management consulting firm Stax and Joshua M. Brown of Ritholtz Wealth Management, do not think so. They believe that all the FANG stocks benefit from the consumer shift towards ecommerce, cloud services and online activities in general. Topping all this is the trend towards mobile. FANG Stocks Are all about Relevant Tech and Trends Online shopping and online social networking are the trends nowadays and most of these FANG companies have significant presence on consumers’ mobile phones, increasing their cash earning potential. These companies are now also significantly investing in cutting edge and relevant technology such as artificial intelligence and robots as well as startups. So it isn’t surprising that FANG stocks have such high valuations.
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Analysts believe that the technological trends these FANG companies have been hitchhiking on are only getting stronger. Kahn therefore recommends owning a piece of them. While there is some short-term risk involved, corrections can give you opportunities for buying more. Analysts don’t consider buying stocks of companies competing with the FANG stocks as a great option.
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