Whether it’s the FANG group, FAAMG, or FAANG being talked about, it’s like alphabet soup on Wall Street these days. The long and the short of these jumbles is that investors love Facebook, Amazon and Alphabet/ Google stock, while they merely like Apple, Netflix and Microsoft. The volatility among these major tech names and others has been extreme over the last week and a half, and it shows no sign of slowing down.
FANG group still strong
In a note to investors dated June 15, Canaccord Genuity analyst Michael Graham updated his valuation for the FANG group (Facebook, Amazon, Netflix, Alphabet/ Google). At a time when much of the rest of Wall Street has moved on to FAAMG or FAANG, Graham remains focused on the FANG group. He noted that the four stocks have “trounced” the S&P 500, each rising by approximately 30% over the last six months. The S&P has risen only 11% over the same timeframe.
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He feels that the drivers for the FANG group are still intact, as their fundamentals remain strong. He noted that many have tried to explain why the FANG group has outperformed the rest of the market by so much and that many have suggested extreme momentum buying driven by the rise in passive investing.
He disagrees, however, as he thinks it is much simpler, in that the four stocks making up the FANG group “represent a large portion of the growth opportunities within large cap tech.” Additionally, he said that six months ago, the four stocks’ valuations were “quite reasonable,” but now, the valuations of the FANG group are “less obvious.” This view could be why he remains focused only on those four stocks while most other analysts have shifted away from FANG in favor of FAAMG or FAANG.
Alphabet/ Google stock downgraded
Graham sees the main drivers of the FANG group as “digital advertising, digital video viewing, eCommerce, and cloud services, and he sees “ample room” for further growth in all of these drivers. However, he did adjust his valuations for the four stocks and even downgraded Alphabet/ Google stock.
He feels that the rest of this year will likely be fine for Alphabet/ Google stock, and next year has “a very good chance at achieving the sentimental 20% Google Properties growth level.” He’s concerned, however, because he believes that too much of the last two years’ growth has come from increases in ad load on mobile search and YouTube, both of which will be hard to repeat. He also warned that consensus estimates for the company’s gross margin are just too high. He adds that although revenue will make up most of the difference, he sees this as limiting the potential for upward earnings per share revisions.
Additionally, the Canaccord Genuity analyst explained that the P/E multiple of 24 times is historically expensive for Alphabet/ Google stock. As a result, he downgraded the stock from Buy to Hold but maintained his $1,000 price target.
In addition to the downgrade on Alphabet/ Google stock, Graham boosted his price target for Amazon from $1,150 to $1,200 and raised his price target for Netflix from $165 to $175. He reiterated his Buy ratings on both stocks and his Buy rating and $175 price target on Facebook.