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Why to Buy the Dip in FAANG ETFs

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stocks, particularly the FANGs, were once investors’ darling, but caused a steep slump in Wall Street in October. Rising rate worries, overvaluation and U.S.-China trade tensions led to this massacre.

Per an article published on Associated Press, technology and Internet-based companies normally record high profit margins. Now, in a rising rate environment, the profitability of those companies will be compromised as they will end up paying higher interests on borrowed money.

The online-behemoth Amazon.com (AMZN - Free Report) and Internet television network Netflix (NFLX - Free Report) have shown maximum weakness. Amazon probably has seen its worst month since November 2008 and the sell-off has brought it down to its lowest intraday levels since April, per Bloomberg. Netflix saw its worst-monthly slide since April 2012.

Michael Matousek, head trader at U.S. Global Investors Inc. indicated that it is the result of investors’ tendency to shift toward “old tech” names that have slower growth, but lower valuations, as quoted on Bloomberg.

However, investors should note that this sudden rout in the tech sector seems to be passing. There are plenty of favorable factors that justify a buy-the-dip-in-FAANG ETFs. 

Investors should note that FAANGs – Facebook (FB - Free Report) , Amazon, Netflix, Google-parent-Alphabet (GOOGL - Free Report) , Apple (AAPL - Free Report) – along with Microsoft (MSFT - Free Report) made up half of the gains for the S&P 500 in 2018.

Valuation Looks Fairer

The forward P/E ratio of Facebook is 21.5x versus 33.0x boasted by the industry, while the growth picture is pretty solid. Expected revenue growth for fiscal 2018 is 36.2% versus the 5% industry figure. Expected earnings growth is 16.3% versus 5.1% decline expected for the industry.

Amazon’s expected revenue and earnings growth for fiscal 2018 is 30.8% (versus industry average of 21.7%) and 321.3% (versus industry average of 23.7%). Such huge earnings growth should place Amazon at an overvalued position (forward P/E of 89.8x) than the industry (27.4x).

The story is the same for Google which is undervalued at a P/E of 27.2x versus the industry-figure of 33.0x. Revenue growth for fiscal 2018 is 22.8% versus 5% industry average, while earnings growth is expected to be 31.9% against a decline in 5.1% earnings growth.

Apple’s valuation is almost on par with the industry, with the forward P/E ratio at 16.2x versus 15.9x. However, its revenue and earnings trail that of the industry.

Expected revenue and earnings growth for Netflix in fiscal 2018 is 35.5% (versus industry average of 17.8%) and 108.7% (versus industry average of 33.5%). However, the stock is still way overvalued at a forward P/E multiple of 115.7x versus industry average of 20.3x.

Upbeat Industry Rank

Google and Facebook belong to a top-ranked Zacks industry (top 43% and top 35% respectively), Netflix comes from the top 37%, Twitter is from the top 20%, Amazon belongs to top 44% and Apple hails from the top 42%. So, if investors are bullish on these industries, they can easily bet on FAANG stocks. CNBC's Jim Cramer commented that despite the steep sell-offs in FANG, these are “still great companies”.

How to Play Via ETFs?

Social media and Internet stock-heavy funds include Communication Services Select Sector SPDR Fund (XLC), Global X Social Media Index ETF (SOCL - Free Report) and O’Shares Global Internet Giants ETF OGIG. Facebook and Google have exposure to these ETFs.

Tech ETF iShares U.S. Technology ETF (IYW - Free Report) takes investors to Facebook, Apple and Alphabet. Facebook & Netflix-heavy ETFs are Invesco NASDAQ Internet ETF (PNQI - Free Report) , First Trust Dow Jones Internet Index (FDN - Free Report) and XLC.

And investors interested in having exposure to ProShares Online Retail ETF ONLN, Vanguard Consumer Discretionary ETF (VCR - Free Report) and Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) .

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