- The term “FANG” was first used by CNBC analyst Jim Cramer in 2015, referring to high growth stocks –Facebook, Amazon, Netflix, and Google.
- Investors added Apple to the basket about two years later.
- Back in early to mid-2018, FAANG stocks still dominated the market. But in the second half of last year, those stocks started to fall out of favour with Wall Street.
- FAANGs have rebounded in the new year, with Netflix leading the way, up 33%.
- However, one analyst told Markets Insider the FAANGs cannot be viewed as a group anymore and investors need to differentiate their business models and the risks associated with them.
It’s time to break up the FAANGs, according to one trading pro.
FAANG is an acronym for the five popular tech stocks – Facebook, Apple,Amazon,Netflix, and Google– which have for years soared and dwarfed the competition. The basket was originally named FANG, when CNBC’s Jim Cramer coined the term back on February 5, 2013. Apple was added by investors around two years later, forming the FAANG basket.
Fast forward three years to early to mid-2018, and FAANG stocks were still dominating the stock market as investors piled in despite stretched valuations. But in the second half of last year – especially after “Red October,” when markets faced a huge sell-off amid fears of more Fed rate hikes, uncertainty surrounding the US-China trade war, and concerns regarding the health of the global economy – these mega-cap tech stocks started to fall out of favour with Wall Street. When the dust settled, all five names were in bear-market territory – down at least 20% from their highs.
But, the tech giants have rebounded to start this year, with Netflix leading the gains, up 33%. Alphabet (Google), meanwhile, has seen the smallest advance, up 7%.
“There’s some divergence going on within that group,” Shawn Cruz, manager of trading strategy at the brokerage firm TD Ameritrade, told Markets Insider. “You have to differentiate between all the stocks that fall into that same basket.”
Cruz pointed to the stocks’ forward price-to-earnings ratio, or how much investors are willing to pay for $US1 of earnings in the future, to show the divergence among the tech titans. Usually, if investors are willing to pay more for a stock to get $US1 of earnings, it means they think the company is less risky.
Here are the Forward P/E ratios for the FAANG stocks, according to Cruz:
- Netflix: 67
- Amazon: 43
- Google: 19
- Facebook: 16
“What the markets are telling you is that they think the earnings estimates assigned to Google, Facebook, and Apple are much riskier than the earnings estimates that are assigned to Amazon and Netflix,” Cruz said.
The risks are associated with their business model, he added. For example, Apple is already in the mature part of its business cycle, while Netflix is still in its early stages of growth.
On Tuesday, Apple said in its holiday-quarter earnings release that sales of its flagship iPhone plummeted 15%, and that its business will continue to struggle in the coming months.
On the opposite end of the spectrum, Netflix said in its fourth-quarter report that it added 8.8 million paid subscriber globally, topping Wall Street estimates of 7.6 million. The streaming giant expects to add 8.9 million paid international subscribers in the first quarter, well above the Wall Street consensus of 8.5 million.
“Markets are not expecting the group as a whole to move higher,” Cruz said. “Right now, Netflix and Amazon are definitely expected to lead the pack.”
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