The five FAANG stocks are seriously overpriced by many metrics, but social networking leader Facebook Inc. (FB) may be the best of the bunch, according to analysis by CNBC. This is based on a comparison of stock price appreciation to revenue growth. Using these metrics, FAANG members Apple, Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc. (GOOGL), the parent of Google, look comparatively overpriced.
Daniel Niles, the founding partner and senior portfolio manager at AlphaOne Capital Partners, an independent specialty equity asset management firm based in the suburbs of Philadelphia, told CNBC that this comparison is a useful early warning system that can raise "yellow flags." Nonetheless, he adds that fast-growing tech companies normally should have higher than average valuations on this basis.
The Case for Facebook
Facebook stock has risen 36% over the 12 months through June 30, and its expected year-over-year revenue growth for the quarter ending on that same date is even greater, at 42.7%, CNBC says. Facebook is enjoying brisk growth in advertising revenue, and has plans to generate yet more from its massive base of mobile users. (For more, see also: Facebook and Google Dominated in 2016 Global Adspend.)
Meanwhile, the other FAANG stocks have enjoyed share price growth over the last 12 months far in excess of their projected year-over-year revenue growth for the second quarter, per CNBC. Apple's shares have risen 51.5% for the 12 months ending June 30, but its projected revenue growth rate for the second quarter is a mere 6%. For Alphabet Inc.'s Class A shares, the figures are 32% and 20%. For Amazon.com, they are 36.9% and 22.4%. (For more, see also: Facebook, Amazon, Apple: Why One Is a Big Loser.)
On Monday, Netflix reported revenue growth of 32% for the second quarter, and its stock price has gained 64% over the 12 months through June 30. The company missed the consensus EPS estimate of 16 cents by a mere penny, but the stock rose on subscriber growth that was 62.5% greater than expectations. (For more, see also: Netflix Q2 Earnings Miss, Gains on Subscriber Growth.)
The Case for Caution
Valuations for tech stocks, including the FAANGs, are very high compared to historical averages, and this has prompted an accumulation of huge short interest in these stocks. Even Facebook is rather richly priced on the traditional valuation metric of P/E ratio, which is 43.87 based on actual 2016 EPS, 32.44 versus estimated 2017 EPS, and 26.63 relative to forecasted 2018 EPS, per data from Zacks Investment Research reported by Nasdaq. Expectations of robust earnings growth are built into these valuations, and thus an earnings disappointment could cause Facebook's stock to tumble.
As a point of comparison, as of July 14, the P/E ratio on the entire S&P 500 Index (SPX) was 24.29 based on trailing 12 months' earnings, and 18.80 based on estimated forward 12 months' earnings, per data from Birinyi Associates reported by the Wall Street Journal. Based on the analysis of data from 1990 through July 2015, the average forward P/E on the S&P 500 during this period was 16.5, according to the Federal Reserve Bank of Cleveland. (For more, see also: Tech Stocks May Be Both Cheap—and Risky.)