With a combined market cap of approximately $2.8 trillion and at one time representing 50 percent of the market cap of the Nasdaq 100, Amazon, Apple, Facebook, Netflix, and Google (now Alphabet) can easily swing markets in either direction and together they’ve been stoking the fire of the longest bull market in history. As these companies expand their reach, impact and market caps, all the major indexes have become increasingly dependent on them. The question for advisors and their clients is, do any of the FAANG stocks still represent sound investment opportunities?
There’s no doubt that Amazon is an amazing success story after going from an online bookseller to a company that briefly hit a $1 trillion market cap in less than 25 years. The company is showing consistent growth but still posts cash flow deficits every year, making it difficult for potential investors to determine if this growth is sustainable over the long term.
Among the five FAANG companies, Netflix is clearly the weakest of the group. Although the share price topped $400 in July by the middle of November it had dropped to under $290. The company will likely remain with negative cash flow for the foreseeable future as they pour borrowed money into creating original content. Although Netflix has an impressive 130 million subscribers, pulling in the next 130 million is likely to be realized at a much lower average revenue per user. And with the growth of other streaming services, such as Disney which will be pulling all its content from Netflix in the coming months, increased competition is likely to keep Netflix from raising prices too aggressively.
The explosion of e-commerce has changed the way the world shops and it’s a theme that is apparent beyond the sphere of the FAANG companies. The growth of online shopping driven by Amazon has been a great benefit to credit card companies, especially MasterCard (MA) and Visa (V) which together account for more than 80 percent of card spending in United States. With strong incremental margins, there is tremendous room for growth, with tens of trillions of dollars of payment opportunities across cash/check, digital, and new segments.
Advisors should also keep in mind that there are tech companies, such as Accenture and Cognizant Technology, who give investors the opportunity to benefit from the growth in technology without investing in the FAANGs. Accenture is doing a lot of consulting to help companies build digital-enabled business models and transition to the cloud. They’ve enjoyed relatively consistent single digit revenue growth (around 10 percent earnings per share) for around 20 years and looked positioned to continue on that track.
Tesla isn’t one of the FAANG companies but it has been in the news quite a lot in recent months. Elon Musk is brilliant and his team builds great vehicles, but no automobile manufacturer has ever managed to consistently generate excess returns on invested capital. There’s no evidence to date that the story from Tesla will be any different. All the big automakers are investing in electric and hybrid vehicles and companies like GM and Fiat Chrysler managed to shed millions of dollars in debt through their reorganizations while Tesla still has more than $10 billion in debt with more than $1 billion of that due in the next six months.
It’s important for investors to keep in mind that e-commerce and technology aren’t the only games in town. With all the headlines about these and other tech companies, like Tesla for instance, investors can lose sight of the many alternative options that exist in other sectors.
There are many companies that have business models just as strong as the FAANGs, but with better cash flow visibility, a must-have for advisors trying to estimate a company’s intrinsic value with a reasonable degree of accuracy.
A good strategy for advisors seeking investment opportunities for clients is to research non-FAANG firms with sustainable competitive advantages. Below is a list of four companies, but there a lot more for investors willing to do their homework.
A sector that probably hasn’t occurred to many advisors is auto salvage. Salvage frequency is increasing due to an aging vehicle base, rising repair costs and insurance companies salvaging vehicles more frequently. Copart (CPRT), is a global online auctioneer of salvaged cars with limited competition, putting and in a great position to capitalize on this growing trend.