Five years ago, they seemed unstoppable. The so-called FAANG stocks – i.e., Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Google (GOOG) – were the center of the market universe, their dominance unquestioned and their influence undeniable. Often, as the FAANGs went, so went the market.
Now look at them.
In those five years, Facebook stock is down 21.5%, versus a 44% gain in the S&P 500, and the company has changed its name to Meta Platforms (META), thus rendering the “F” part of FAANG no longer accurate, technically. Netflix has struggled almost as mightily, especially this year; it’s down 60% (!) year to date as new customers have dried up and years of free spending on its seemingly endless geyser of programming are finally catching up to them.
Amazon peaked about 15 months ago when the company was still benefitting greatly from early-Covid quarantining/isolating as most Americans were still shopping from home like never before. Now that Covid has mercifully faded, folks have been eager to get out and do their shopping in person, to Amazon’s detriment. Revenue growth has slowed, profits have really narrowed, and, as a result, AMZN stock is down 32% year to date and 27% in the last two years. Its best days appear behind it.
Apple and Google (er, Alphabet) are the only two FAANG stocks that have actually gained ground in the last two years. AAPL stock is up 21% during that time, and shares are down “only” 22% this year, less than the S&P 500 and far less than the Nasdaq. GOOG stock is down 30% this year, but up 33% in the last two years, tops among the FAANGs. Their returns are even more impressive over the last five years: AAPL is up 260%, GOOGL is +104%. Compared to META and NFLX, they look like fast-rising micro caps.
But it’s easy to look back at how the FAANGs have deteriorated over the last five years. What should we expect from them in the next five? Are any of them solid value plays overly punished by the collapse of all technology stocks in the last 10 months? Let’s examine by looking at each company’s growth trajectory.
FAANG Stocks by the Numbers
The average expected revenue growth for the five FAANG stocks is 7.5% in 2022 and 10.2% in 2023. According to Yardeni Research, the average estimated revenue growth among S&P 500 companies is 12% this year and a mere 4.1% next year. So, while the FAANGs are growing much slower than the average large-cap stock this year, they are expected to grow more than twice as fast next year. As for earnings, only Apple is expected to grow EPS both this year and next.
Now let’s look at valuations, which admittedly have never really been a factor with these stocks – they’ve almost always been high and have never prevented the stocks from motoring higher. Today, the FAANGs trade at an average forward price-to-earnings ratio of 24.6, much lower than their historical norms but still much higher than the 16.95 forward P/E among S&P 500 stocks right now. A 45% higher valuation than other large caps is warranted when the FAANGs were routinely growing their bottom line by double digits, not when all five are expecting 2023 profits to be lower than 2021 profits.
They’re even less attractive on a price-to-sales basis. The average FAANG currently trades at a P/S ratio of 4.2, or 82% higher than the 2.28 P/S ratio for the S&P. And not one of them is expected to grow sales faster than the average S&P company this year.
It all adds up to a grim picture for the once-mighty FAANGs. Are all five FAANG stocks “dead” or un-investible? Certainly not. AAPL and GOOG have held up fairly well actually, and AMZN has the brightest 2023 sales outlook (+15.4%) and is barely more than a year removed from all-time highs. If you own any of those three stocks, hang on to them. Better days are almost surely ahead. You could even add a few shares once the market finally gets its act together.
As for META and NFLX, I would no longer recommend them even to long-term investors. Both seem outdated, passed over by newer, faster-growing rivals. Even at such depressed share prices, I don’t like their prospects moving forward.
So, yes, the FAANG stocks as a seemingly invincible group are dead. You could rename them “AAG” stocks, though that doesn’t exactly roll off the tongue. Besides, when the next major uptrend arrives – it could be sooner than you think; when everyone thinks the market is doomed, it tends to go in the opposite direction – new leading growth stocks will surely materialize. Soon, there could be an entirely different group of stocks, with a cleverer acronym than “FAANG,” that dominates market conversation and sometimes dictates its movements.
It was a good run while it lasted for the FAANGs. But like an aging athlete, their best days are behind them. Time to go searching for the next big thing.