Do Big Tech stocks deserve the hype?
Seemingly unfazed by the economic uncertainty infesting industries far and wide, tech stocks within the Nasdaq have kept the index humming as it continues to reach new heights. The biggest names in tech are driving the Nasdaq’s recovery and subsequent outpacing of the wider stock market, with investors large and small pouring their money into FAANG companies: Facebook, Apple, Amazon, Netflix and Alphabet (or Google). Joined by Microsoft and Tesla, these tech titans have watched their shares continue to climb thanks to products and services that are perfectly suited for a pandemic. Let’s take a look at the biggest names in the tech game and see if they’ve still got room to run.
Facebook (ticker: FB)
A platform predicated on staying connected with friends and family seemed downright essential earlier this year. In March, FB touted elevated levels of Facebook and WhatsApp usage in countries that had been hit by the virus particularly hard. Fast forward to July, and Facebook has squandered what goodwill it had over concerns about the hate speech rules on its platform, leading many of its largest advertisers to pull their ads from Facebook entirely. Considering that more than 98% of Facebook’s total revenue comes from advertising, this could have serious repercussions in upcoming earnings reports. A price-earnings ratio above 30 isn’t historically all that high for Facebook and may reflect growing investor trepidation.
When the outbreak began, reports of production slowdowns from facilities in China mixed with Apple store shutdowns around the world led some to believe that Apple would struggle in the months to come. But the company has had an outstanding year, with a fiscal second-quarter earnings beat led by record revenue from Apple’s services division, which includes Apple Pay, Apple Music, iTunes and the App Store. But second-quarter wins have sent investors into the third quarter with higher expectations than ever, as indicated by a P/E ratio of around 29 — the highest it’s been in over a decade. That means when earnings are released on July 30 they’ll need to indicate Apple continues to fire on all cylinders. But even if results don’t impress, Apple’s upcoming 5G iPhone has customers (and investors) looking toward the future already.
Analysts have high expectations for Amazon’s second quarter earnings announcement on July 30, and so does Amazon — the company expects net sales to increase anywhere between 18% and 28% this quarter. For that matter, investors have high expectations as well: Amazon’s P/E ratio stands above 140, compared to 80 at the beginning of the year. That makes Amazon priced for perfection, but it’s easy to understand why — online shopping, Amazon Web Services, Amazon Fresh, Prime Video and even Twitch have all directly benefited from the pandemic. If Amazon announces anything less than a perfect quarter shares are sure to drop, but not for long — after all, who wouldn’t want to invest in what has quickly become the world’s most essential company?
The FAANG stocks may receive most of the attention in the market these days, but they might need to add a “T” in there soon. The hype around Tesla has hit untold heights as the company recently reached a key milestone for inclusion in the S&P 500: a fourth consecutive quarter of profitability. Tesla delivered fewer vehicles year over year in the second quarter, but it still managed to outpace expectations even as other automakers have been dragged down by the pandemic. A strong quarter has solidified the company’s position as the world’s most valuable carmaker. A P/E above 750 is obscenely high even for TSLA, but with new Gigafactories planned to cover three continents total, it’s clear that the company still has plenty of growth ahead of it.
No company is profiting more from the work-from-home boom than Microsoft. People at home still have to use Windows, Office and Teams to get their work done, and chances are good that the company paying those employees utilizes Microsoft’s cloud service Azure — last quarter revenue from Azure grew a whopping 47% year over year. Maybe those employees are looking for new jobs, and Microsoft’s happy to help with LinkedIn. Or maybe you’re just stuck at home and bored — Microsoft has you covered with content and services on its Xbox console, where revenue grew a blistering 65% year over year. Shares of Microsoft are trading with a P/E ratio around 35, higher than the earnings multiple of 27 it had to start the year — but frankly, there’s still plenty of room for this company to run.
Much like Facebook, Alphabet’s income is predicated on advertising — and with concerns about consumer spending declines, companies have begun to cut advertising, leading to investors worrying that Alphabet’s bottom line will take a hit. But last quarter Alphabet proved those fears to be largely unfounded — a 13% increase in overall revenue was led by strong results from the company’s Google Search, YouTube and Google Cloud segments. However, that quarter included two months during which the pandemic had yet to fully hit, while things have only gotten worse for many advertisers during the long months of the second quarter, and Alphabet management expects that Google Search will lag as a result. Investors seem to understand there’s slowing growth ahead for Alphabet — a P/E ratio of just more than 30 for both GOOG and GOOGL is nowhere near its high of 58 from a few years back.
Netflix’s membership has skyrocketed since the beginning of the pandemic, with Netflix adding 15.8 million new members in the first quarter followed by over 10.1 million new members last quarter — outpacing analyst expectations of 8.26 million in the latter quarter. Regardless, shares fell anyway when investors heard that next quarter Netflix predicts growth will slow down as the shock of quarantine begins to dull, and that free cash flow will drop back into negative territory once production resumes next year. Still, the company has had an outstanding year that has set it up for long-term success, and with a P/E ratio above 80 well below the company’s all-time high of 450, Netflix shares may be reasonably valued (for once).
Do FAANG Stocks Deserve the Hype?
— Facebook (FB)
— Apple (AAPL)
— Amazon (AMZN)
— Tesla (TSLA)
— Microsoft (MSFT)
— Netflix (NFLX)
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Investing in FAANG Stocks: Do They Deserve the Hype? originally appeared on usnews.com