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These companies were avidly followed by investors as they were expected to grow strongly and generate solid returns. And they price charts certainly indicate that they have done that job.
Take, for example, the growth rates in the last five years: Facebook has grown 723.1%, Amazon 278.6%, Netflix 2243.3% and Alphabet 152.9%, all of which were significantly higher than the S&P 500’s growth rate of 74.2%. These four companies have in fact grown so strongly that today, their combined market capitalization is nearly a full percentage of the S&P 500’s total.
To be fair, the price appreciation didn’t come out of thin air; the companies have been growing revenues very strongly: Facebook has seen revenue growth of 644.8% in the five years ending 2016, Amazon 182.9%, Netflix 175.5% and Alphabet 138.2%. But will the growth continue? And are the stocks fairly valued today? Let’s find out.
Facebook
Facebook shares have appreciated 33.7% in the past year while the S&P 500 moved just 15.1%.
Investors appear to be valuing the company based on its sales, which they expect will continue growing much faster than the S&P 500. That could be why the trailing twelve months’ price/sales ratio of 14.6X is so far ahead of the S&P 500’s 3.1X.
The good news is that the company’s median price/earnings growth (PEG) of 1.08 is below the S&P 500’s 1.87. Both the high and low values for PEG are also below the S&P 500.
Amazon shares have appreciated 19.7% in the past year while the S&P 500 moved just 15.1%.
Amazon uses aggressive pricing strategies in addition to a multi-year expansion drive acquiring buildings/fulfillment centers and digital content in rapid succession. As a result, its earnings are relatively small compared to revenue. Investors also expect that these efforts will yield significant earnings growth in the future as the company captures even greater market share. As a result, its median PEG ratio of 3.85 is well above the S&P 500’s 1.87.
On a price/sales basis, Amazon appears more or less fairly valued with the high, low and median values of 3.5X, 2.7X and 3.1X more or less in line with the S&P 500.
Amazon shares carry a Zacks Rank #5 (Strong Sell).
Netflix shares have soared 96.8% over the past year, compared with 15.1% for the S&P 500.
The high, low and median PEG values for Netflix are 13.46, 3.70 and 4.85, respectively, all of which are above the S&P 500.
The high, low and median P/S values for Netflix are 8.3X, 5.3X and 7.0X, respectively again ahead of the S&P 500, indicating that the shares are overvalued.
Alphabet shares have appreciated 16.1% over the past year, slightly ahead of the 14.5% for the S&P 500.
Similar to Facebook, investors are following the company’s sales, which they expect will continue growing rapidly. As a result, the high, low and median P/S numbers of 7.7X, 4.7X and 6.5X are ahead of the 3.2X, 1.9x and 2.7X for the S&P 500.
The high, low and median PEGs of 1.89, 1.46 and 1.56 over the past year are however lower than the 1.91, 1.84 and 1.87, respectively, for the S&P 500 indicating that valuation is fair.
Alphabet shares carry a Zacks Rank #3.
Conclusion
Despite their history of price appreciation, it appears from the above that the FANG stocks are trading at a fair-to-rich valuation. It’s therefore a good idea to avoid these stocks for now.
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Image: Bigstock
The FANG Stocks Valuation Story
The FANG stocks are Facebook , Amazon (AMZN - Free Report) , Netflix (NFLX - Free Report) and Google, which later reorganized itself as Alphabet (GOOGL - Free Report) .
These companies were avidly followed by investors as they were expected to grow strongly and generate solid returns. And they price charts certainly indicate that they have done that job.
Take, for example, the growth rates in the last five years: Facebook has grown 723.1%, Amazon 278.6%, Netflix 2243.3% and Alphabet 152.9%, all of which were significantly higher than the S&P 500’s growth rate of 74.2%. These four companies have in fact grown so strongly that today, their combined market capitalization is nearly a full percentage of the S&P 500’s total.
To be fair, the price appreciation didn’t come out of thin air; the companies have been growing revenues very strongly: Facebook has seen revenue growth of 644.8% in the five years ending 2016, Amazon 182.9%, Netflix 175.5% and Alphabet 138.2%. But will the growth continue? And are the stocks fairly valued today? Let’s find out.
Facebook
Facebook shares have appreciated 33.7% in the past year while the S&P 500 moved just 15.1%.
Investors appear to be valuing the company based on its sales, which they expect will continue growing much faster than the S&P 500. That could be why the trailing twelve months’ price/sales ratio of 14.6X is so far ahead of the S&P 500’s 3.1X.
The good news is that the company’s median price/earnings growth (PEG) of 1.08 is below the S&P 500’s 1.87. Both the high and low values for PEG are also below the S&P 500.
Facebook shares carry a Zacks Rank #3 (Hold).
Amazon (AMZN - Free Report)
Amazon shares have appreciated 19.7% in the past year while the S&P 500 moved just 15.1%.
Amazon uses aggressive pricing strategies in addition to a multi-year expansion drive acquiring buildings/fulfillment centers and digital content in rapid succession. As a result, its earnings are relatively small compared to revenue. Investors also expect that these efforts will yield significant earnings growth in the future as the company captures even greater market share. As a result, its median PEG ratio of 3.85 is well above the S&P 500’s 1.87.
On a price/sales basis, Amazon appears more or less fairly valued with the high, low and median values of 3.5X, 2.7X and 3.1X more or less in line with the S&P 500.
Amazon shares carry a Zacks Rank #5 (Strong Sell).
Netflix (NFLX - Free Report)
Netflix shares have soared 96.8% over the past year, compared with 15.1% for the S&P 500.
The high, low and median PEG values for Netflix are 13.46, 3.70 and 4.85, respectively, all of which are above the S&P 500.
The high, low and median P/S values for Netflix are 8.3X, 5.3X and 7.0X, respectively again ahead of the S&P 500, indicating that the shares are overvalued.
Netflix shares carry a Zacks Rank #3.
Alphabet (GOOGL - Free Report)
Alphabet shares have appreciated 16.1% over the past year, slightly ahead of the 14.5% for the S&P 500.
Similar to Facebook, investors are following the company’s sales, which they expect will continue growing rapidly. As a result, the high, low and median P/S numbers of 7.7X, 4.7X and 6.5X are ahead of the 3.2X, 1.9x and 2.7X for the S&P 500.
The high, low and median PEGs of 1.89, 1.46 and 1.56 over the past year are however lower than the 1.91, 1.84 and 1.87, respectively, for the S&P 500 indicating that valuation is fair.
Alphabet shares carry a Zacks Rank #3.
Conclusion
Despite their history of price appreciation, it appears from the above that the FANG stocks are trading at a fair-to-rich valuation. It’s therefore a good idea to avoid these stocks for now.
5 Trades Could Profit "Big-League" from Trump Policies
If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.
Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure.
See these buy recommendations now >>