The five FAANG technology stocks are rated overweight for 2018 by Morgan Stanley (MS), but the report is filled with enough qualifications and concerns to make it sound more like a market weight recommendation. Among other things, Morgan Stanley expects their performance to decline in 2018, both on an absolute basis and relative to value stocks. The five FAANG stocks, with their year-to-date price gains through the close on December 11, are:  Facebook Inc. (FB), +56%; Apple Inc. (AAPL), +51%; Amazon.com Inc. (AMZN), +56%; Netflix Inc. (NFLX), +50%; and Alphabet Inc. (GOOGL), the parent of Google, +35%.

Moreover, their analysis of the S&P 500 Index (SPX) since 1997 indicates that the five stocks that added the most market capitalization in one year tend to underperform versus the index in the following year, but with widely varying results. The top four market cap growers in 2017 include Apple, Amazon, Facebook and Alphabet, while Netflix ranked number 31, as of the December 11 release date of the report, "Bullish on FAANG in '18, But What Are the Risks?" Morgan Stanley is bullish on the FAANGs regarding "their secular growth ability, disruptive capacity and product cycles," while also warning that "they are less insulated from cyclical pressures than many investors appreciate."

Facebook

Morgan Stanley's price target is $200, 12% above the December 11 close. They project ad revenue to grow by 23% in 2018, and note that the pricing of ads on both Facebook and its Instagram subsidiary is significant lower than for other media, suggesting further upside potential. They also are upbeat on the prospects for the new Facebook Watch video streaming service featuring original content. However, they project that a recession in 2019 is likely to spark a contraction in total online ad spending from their levels in 2018.

Apple

Apple also has a price target of $200, 16% above the December 11 close. Morgan Stanley finds that Apple is valued more like a value stock than a growth stock, with its relatively low multiple (a forward P/E of 14, per Thomson Reuters data reported by Yahoo Finance). They also estimate that it will be "the single largest beneficiary of tax reform," from both a large reduction in its effective tax rate and the ability to repatriate $252 billion of overseas cash with little or no tax penalty. (For more, see also: Why Apple Faces Troubles Ahead.)

Morgan Stanley also projects robust iPhone unit sales, growing by 21% year-over-year in 2018, partly driven by heavy consumer demand in China where the base of iPhones in service is relatively old. They also believe that Apple is better insulated against a consumer-led recession than in previous years because the company derives almost 66% of its revenue than the iPhone, which is "the single most used consumer technology product," having become almost a consumer staple. But weak global consumer spending and a strong dollar are overseas risks. Competition by Android devices and longer replacement cycles or lower subsidies from carriers are also risks. Rising memory costs could cut margins.

Amazon

Price target: $1,250, a 7% increase from the December 11 close. The good news is that higher-margin businesses such as cloud computing, video streaming and advertising are growing faster than its lower-margin core retailing. While Morgan Stanley projects that a consumer-led recession in 2019 would have negative impact on core retailing, they agree with CEO Jeff Bezos' comments that recessionary environments are good for the growth of cloud computing, driven by cost-cutting corporations. (For more, see also: Amazon May Soon Become Market's 'Trillion Dollar Bull'.)

Risks include price competition from other cloud services providers, and larger than expected investments in brick-and-mortar retail ventures. Also, investments to increase Prime shipping speed and video content may not spur sufficient subscriber growth or spending.

Netflix

Price target: $235, up 26% from December 11. Morgan Stanley believes that Netflix should benefit from a worldwide trend towards watching so-called over-the-top (OTT) content, or video streamed over the internet rather than through broadcast, cable or satellite TV. With low cost per hour of engagement, Morgan Stanley expects Netflix to ride out a recession with little impact. While they believe that Netflix has pricing power, they recognize that recent price increases may lead to loss of subscribers. Also, the battle to provide exclusive content will drive up costs.

Alphabet

Price target: $1,150, up 10% from December 11. Advertising revenues from mobile search are growing briskly, but at a decelerating annual rate, 43% in 2017 versus a projected 34% in 2018. Online advertising is on track to reach 42% of all U.S. ad spending in 2017, climbing to 50% in 2019 without a recession, or 47% with one. Meanwhile, Google currently captures about 40% to 45% of the U.S. online ad market. Key risks are slowing online ad spending, and possible antitrust penalties imposed by the EU.

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