FAANG stocks, defanged?

All save one of the company slipped below fair value estimates. Is it time to buy?

Ruth Saldanha 25 March, 2020 | 1:19AM

Computers and cell phones

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

We recently talked about how the market volatility caused by COVID-19 had pushed technology stocks into rare undervalued status. The Morningstar U.S. Technology Index has fallen 13.3% for the year to date (expressed in U.S. dollars) while the S&P Technology Select Sector Index gave up 13.5% for the same period, as of March 23.

Bad as this performance seems, it’s better than the S&P 500, which lost 22.4% for the year to date (in Canadian dollar terms), and the S&P/TSX Composite index, which is down almost 34% for the same period, as of March 23.

In this timeframe, however, the FAANG stocks (consisting of Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (Alphabet Inc. (GOOGL)) seem to have outperformed them all, with the NYSE FANG+ index losing just 2.66% for the year to date.

Does this mean that these blue-chip stocks are a buying opportunity? Some of them. Our analysts find that the fundamentals of these companies are unchanged, so opportunistic buyers could find long-term growth opportunities in some of these stocks.

Here’s a look at the five:

Name

Morningstar Star Rating

Economic Moat

Moat Trend

Fair Value

Analysis Date

Facebook

4

Wide

Stable

0.69

1/29/2020

Amazon.com

4

Wide

Stable

0.79

1/31/2020

Apple

3

Narrow

Stable

0.93

1/28/2020

Netflix

1

Narrow

Stable

2.40

1/22/2020

Alphabet

4

Wide

Stable

0.75

2/3/2020


Netflix is still overvalued according to our estimates, trading at over double our fair value estimate of US$150. Morningstar analyst Neil Macker raised his fair value estimate for Netflix in January 2020, primarily from incorporating faster international customer growth, albeit at lower average revenue per user as it rolls out cheaper plans to compete in emerging markets.

We’ve already discussed two of the three 4-star stocks, Apple and Alphabet, in an earlier piece. The cheapest of the FAANG stocks is Facebook. Morningstar analyst Ali Mogharabi believes its fair value is at US$215, so it is trading at a discount of over 30%.

“We model double-digit top-line growth through 2024, assuming impact from the latest data breach on user count and ARPU. As the firm plans to further invest in R&D and content creation, in addition to data security, we see the average operating margin declining during the next five years. Our projections represent a five-year compound annual growth rate of 17.4% for total revenue and a five-year average operating margin of 35%,” he says.

He points out that Facebook's revenue growth will be driven primarily by growth in online advertising and a growing allocation of online ad dollars toward mobile, video, and social network ads. He expects 21% and 20% year-over-year total revenue growth for 2020 and 2021, representing total revenue of US$85.8 billion and US$102.5 billion, respectively. He also expects an 11% five-year CAGR in Facebook's monthly active users, mainly due to strong growth in Asia and other regions, and assumes deceleration in overall advertising ARPU growth to 6% per year during the next five years, from the average annual 25%-plus growth the firm displayed during the past five years.

“Our fair value uncertainty rating for Facebook is high, based on uncertainty around future advertising growth rates and additional regulations restricting Facebook's access to and use of data, both of which drive growth in the company's sole source of revenue today,” he warns.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc A1,520.86 USD0.57
Amazon.com Inc3,084.00 USD-0.64
Apple Inc388.23 USD1.65
Facebook Inc A239.73 USD0.31
Netflix Inc524.88 USD-0.12

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca

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