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All Contents © 2019The Kiplinger Washington Editors
By Dana Blankenhorn
| May 25, 2017
Jim Cramer of CNBC gets credit for coining the term FANG stocks: Facebook Inc. (FB), Amazon.com, Inc. (AMZN), Neflix, Inc. (NFLX) and Google, the digital artists now known as Alphabet Inc. (GOOG, GOOGL).
Cramer coined the term on Feb. 25, 2013. Since then Alphabet has more than doubled, Amazon is up over 250% and Facebook and Netflix have gone up over 400%.
The total market cap of these four stocks is now $1.55 trillion. Google and Facebook are still growing their ad revenues faster than the market. Netflix and Amazon have become internet TV networks as powerful as ABC, CBS and Fox.
So, good call. I personally own three of these FANG stocks – Alphabet, Amazon and Facebook. My retirement is riding on them.
The question for the house: Does FANG still work? Or is it time to pull the plug? Let’s look at each stock on its own.
Prices and data are from the original InvestorPlace story published on May 23, 2017. Click on ticker-symbol links in each slide for current prices and more.
Facebook is the newest of the FANG stocks, having been founded in just 2004, and coming public in 2012. Like a lot of kids, it is completely dependent on advertising, its cash hoard is tiny, its ambitions are risky and it’s politically vulnerable.
Start with advertising. Every company large enough to build, and sustain, a cloud network has a source of profit to draw on. You don’t buy a cloud as you would capital equipment, with a big loan from the bank. You buy it out of cash flow, $1 billion per quarter to start.
That is why our biggest tech companies, like International Business Machines Corp. (IBM), Hewlett Packard Enterprise Co. (HPE) and Verizon Communications Inc. (VZ), have failed in cloud. You need a source of cash and a willingness to pull the trigger on spending it, quarter after quarter, year after year.
Facebook, to its credit, made the decision to commit to cloud in 2011, a year in which its total revenue was just $3.7 billion. The company wanted to make itself independent of Amazon and was willing to borrow money to do it. The loans, in the form of capital lease obligations, were quickly paid off.
But given its ad dependence, which has destroyed the journalism business model of the U.S. and many other countries, Facebook faces political risk, as when it was accused of affecting the 2016 election. Facebook also retains expensive ambitions in artificial intelligence and virtual reality. Of its $16.1 billion in operating cash flow last year, $4.5 billion went right out the door in capital expenditures and $7.2 billion went into other capital expenditures, mostly research and programming.
But Facebook has something no other company has. Its founder and CEO, Mark Zuckerberg, is still in his early 30’s. He has decades ahead of him, which means Facebook’s vision will remain intact for many years to come. The only tech player comparable to him is Bill Gates, now the world’s richest man. At 35, Microsoft Corporation (MSFT) had split its stock twice, but it was worth just 1/100th of what Facebook is now.
What can Zuckerberg do with Gates’ time?
None of the FANG stocks has as wide or as deep a “moat” as Amazon.
In business, a “moat” is defined as the center of the business, the part of the whole that seems unassailable, a company’s leading positions — its cash cow.
Amazon’s moat today includes not only the money it makes from its online store — over $23 billion just in the most recent quarter — but its Amazon Web Services cloud, which brought in $3.66 billion during the quarter, and roughly $2 billion per quarter it gets from an estimated 90 million Amazon Prime membership fees.
Amazon invests this cash in growing its global footprint, in TV shows and movies, and in new technology products like its Alexa voice assistant, which dominates that market. By simply adding a touchscreen, Amazon recently turned Alexa into a WiFi video phone, a must-have for grandparents the world over.
Thus, founder and CEO Jeff Bezos, still only in his 50’s, is the world’s third-richest person, at $72.8 billion. Amazon stock, derided just a few years ago as a “Ponzi scheme” incapable of showing a profit, is now the market’s most-beloved stock.
Taken purely as a tech operation, Amazon is the unquestioned leader in selling its cloud, it is first in artificial intelligence, it is becoming a leader in media and it is the world’s leading logistics company. After arguing on another site with Amazon bears for a year, I finally got 100 shares. It’s now a huge part of my retirement nest egg, and the stock I am least likely to sell.
What could knock Amazon off its perch? If Bezos was killed by a bus tomorrow the stock would be hammered, despite his having built a strong bench of executives behind him. The taxman could cometh, in the form of a budget adjustment tax or a cloud tax.
John Pasden via Flickr
Despite offering the best performance of all the FANG stocks lately, Netflix remains a minnow in its rivals’ wake.
With a market cap of $68.2 billion, the company is still more comparable to Time Warner Inc (TWX), which AT&T Inc. (T) is in the process of buying, than it is a common internet stock.
That makes sense, because Netflix is in the business of disrupting Time Warner’s HBO, Comcast Corporation’s (CMCSA) NBC or Walt Disney Co.’s (DIS) ESPN than it is the business of any internet rival. In fact, it still runs most of its services on Amazon’s cloud infrastructure, although it maintains an Open Connect program to keep its delivery costs as low as possible.
Netflix stock remains on fire, up 67% in the last year, because its revenues have doubled from 2013 to 2016, and over the last few quarters profit margins have begun expanding, with 6.7% of revenue falling to the net income line in the last quarter. First-quarter revenue growth came in at nearly 35%, year over year.
What investors should be looking at is the fact that cash flow remains weak and the balance sheet showed over $3.3 billion in debt at the end of March and $1.341 billion in cash and investments. The capital goods Netflix buys are TV shows and movies, which it can show exclusively on its streaming network.
Only about 60% of Netflix revenue comes from U.S. subscribers, the rest coming from international operations, which are still losing money. That share should increase over time, as the company reported 49.38 million paid U.S. members and 44.99 million paid international members at the end of March.
Analysts have been predicting a revenue peak for years, but are mollified by the company’s ability to increase prices regularly and the hope is it will eventually be able to offer segmented prices, like a bundle of paid cable services, and even pay-per-view events in time.
What worries this analyst is the fact that Netflix is dependent on its biggest competitor, Amazon, for its infrastructure. Once we do approach peak Netflix, however, the bulls are confident that an infrastructure owner such as AT&T or Verizon will scoop it up, giving investors a final payout.
Netflix will remain the cheapest FANG by market cap until it gets bought by an infrastructure owner, and the hope of bulls is that day remains far away.
Google may just be 20 years old, but it has the steady financials of a company in robust middle age.
Revenues rise steadily, and should top $100 billion in 2017. Operating margins and profit margins remain steady at 25%, meaning one dollar in four goes to the bottom line. The company has a cash hoard approaching $100 billion with debt of $4 billion. Operating cash flow is rapidly approaching $40 billion per year, justifying a market cap of $669 billion.
For a moment this year, Google was actually the world’s most valuable company, then Apple Inc. (AAPL) took off and it’s now worth $805 billion.
Still, Google is King of the Cloud, with apologies to Amazon. Google hand-crafted key cloud innovations like distributed computing, virtualization, renewable energy and the use of ultra-cheap hardware. It did these to run its own services and, until Amazon made a success with it, had no interest in renting its excess capacity. Now, under VMware co-founder Diane Greene, also a Google director, it is doing as much of that as it can.
But Google’s follow-on strategy also has a lot in common with Microsoft. Its Android operating system dominates the mobile space the way Windows once did PCs, and its Chromebook designs are gaining ground in the PC space. Its G Suite applications compete directly with Microsoft Office, and it has successfully embraced and extended from its Chrome browser into a variety of areas, which means a more diversified revenue stream.
Google bears will note, pointing to its first-quarter report, that the company remains primarily an ad company; $21.411 billion of its $24.506 in revenue came from ads. Its “other bets” — things like self-driving cars, robots, hardware and health applications — brought in only $244 million, and lost $855 million.
Google’s success makes it a target, first of the tax man and then of other government regulators. The company seems to be constantly under attack, and settling, with national tax authorities, while others seek imaginative ways to tax Google on what it gives away.
Then there is censorship, where Google has long claimed to be a victim but where it’s now, reluctantly, becoming the police. Google doesn’t remove content. But it can make content harder to find, cutting off its revenue streams.
This article is from Dana Blankenhorn of InvestorPlace.
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