We are less than a week from the beginning of 2018, and many indications for the stock market right now suggest we can expect more of the same. The FANG stocks Facebook Inc (NASDAQ:FB); Amazon.com, Inc. (NASDAQ:AMZN) Netflix, Inc. (NASDAQ:NFLX); Alphabet Inc (NASDAQ:GOOGL)) figure prominently in many analysts’ list of 2018 tech stock themes. They could continue to ride high as they did for most of this year, or they could remain challenged as tax reform and growing issues within their respective segments remain overhangs.
2018 tech stock themes to drive FANG stocks
Although every analyst’s list of 2018 tech stock themes is slightly different, they all share some things in common. In this multi-part series on 2018 tech stock themes, we’ll look at the major components most analysts are talking about right now, starting with the FANG stocks.
GBH Insights analyst Daniel Ives said in a recent note that he expects the FANG stocks to remain strong in 2018, driven by strength in several tech themes that have been growing stronger in recent years. Ongoing e-commerce growth, streaming and online content, online advertising, and the cloud shift among enterprises all bode well for the FANG stocks.
He notes that the regulatory environment, tax reform and macro backdrop offer both opportunities and challenges for the FANG group, but like most analysts, he thinks the benefits outweigh the risks. Meanwhile, Evercore ISI analyst Anthony DiClemente said in his own note earlier this month that all four FANG names have built “meaningful barriers to entry” for competitors, but not everyone is bullish on the FANG stocks.
Is trouble in store for the FANG stocks in 2018?
The vast majority of the commentary around the FANG stocks focuses on the bullish aspect, but Investor’s Business Daily inserts the bearish case for the FANG stocks into the narrative of major 2018 tech stock themes. For example, regulators are starting to express concern that three of the four companies may be becoming too powerful.
For Facebook, this year brought about growing criticism for the runaway impact of fake news circulated via social media. Investigators are even probing the use of ads on Facebook and other social media sites and the possible impact on the 2016 presidential election. News publishers are starting to become unhappy because Facebook’s algorithms are causing problems. European Union regulators have been targeting the social network for quite some time already, so there is a risk that U.S. regulators will finally start holding the company accountable too.
FANG stocks split
EU regulators have been targeting Google in a much bigger way, doling out fines in an attempt to hold the company accountable for anticompetitive practices. Wall Street’s love of Google parent Alphabet seems to have waned ever so slightly late this year as analysts prefer to focus their attention on Amazon, Facebook and Netflix instead, so will 2018 be the year that Google’s problems spread across the digital ad space to Facebook? It’s anyone’s guess.
In intraday trading on Wednesday, the FANG stocks were split, with Facebook stock and Amazon stock in the green and Netflix stock and Alphabet stock in the red. Facebook stock led the way, but the NASDAQ 100 continued to struggle, taking its biggest hit in months over roughly the last month of the year. The broad-based selloff became one of the big themes for the last part of 2017, so some analysts see the risk for the selloff to become one of the major 2018 tech stock themes as well.
The problem for tech has been the fact that most companies pay very little in taxes, an issue many have gotten blasted for in recent years due to their use of tax avoidance practices such as the so-called “double Irish with a Dutch sandwich” and similar strategies. Investors looking for gains from the tax reform bill are shunning tech in favor of names like Walmart, CNBC‘s Jim Cramer said recently, so this could be one of the only times paying less in taxes will penalize a company. He suggested that the rotation from tech into other industries that will benefit more from tax reform could go on longer than what many are expecting.
Click here for Part 2 of our 2018 tech stock themes series: The Amazon.com, Inc. Flywheel Vs. Microsoft Corporation, Walmart Stores, Inc.