Could the next bear market be driven entirely by four stocks? It just might. In 2015, nearly all of the S&P 500’s meager gains were driven by FANG, what is becoming a common acronym for Facebook (ticker: FB), Amazon (ticker: AMZN), Netflix (ticker: NFLX) and Google (ticker: GOOGL). Taking this a bit further, had you stripped-out the 10 best performing stocks from the S&P 500 last year (of which FANG are four), the index’s return would’ve been negative. It’s clear that the biggest players have a disproportionate influence on total return.
Indeed, last year the 10 largest S&P 500 companies were up +11% (on a cap weighted basis), while the other 490 stocks in the index produced a cap weighted loss of -3%. That doesn’t mean all 490 were negative—far from it. But, what it does indicate is that it was a year of extremely narrow breadth, and the opportunity to own winners was as difficult as it gets. That is unless you ‘went big’ with Netflix, Amazon, Google, and Facebook in your portfolio.
Performance outcomes like these often taunt investors, who wonder why they didn’t have more exposure to these big winners in their portfolio. But, it’s also a stark reminder of two of the most common mistakes in investing: chasing heat (buying high) and over-concentrating a portfolio (increasing risk). Both can put your assets in peril, so avoid these common investing pitfalls.
It reminds me of ‘CIMQ’ from the late 1990’s, which stood for Cisco (CSCO), Intel (INTL), Microsoft (MSFT) and Qualcomm (QCOM). Performance of these four stocks, at their peak valuations before the 2000 tech bubble, are eerily being paralleled by FANG in terms of average valuations. Proceed with caution. Just as FANG could prop up the S&P 500 in a given year, as in 2015, so too could it drag the index down significantly if all four tanked in unison. For now, that looks to be less of a concern given robust earnings for all four companies, but it is something to watch. Here are FANGs numbers at a glance:
Adjusted earnings per share of $0.57 (accounting for stock-based compensation and other non-recurring items) beat the Zacks Consensus Estimate of $0.44 per share. Revenues came in at $5.38 billion, edging past our consensus estimate of $5.23 billion. Good stuff.
Facebook’s consistently growing user base was a big catalyst for the company’s results. Its monthly active users (MAUs) grew 15% year-over-year to 1.65 billion, and mobile MAUs grew 21% year-over-year to 1.51 billion. Daily active users (DAUs) were 1.09 billion and mobile DAUs were 989 million, each growing 16% and 24% year-over-year, respectively. Mobile ad revenues for the quarter were $4.2 billion soaring 75% year-over-year. This has been a huge step forward for Facebook, and it’s impressive to see how much traction they’ve gained in such a short time.
At the end of Q1, Facebook had cash, cash equivalents and marketable securities of $20.62 billion, up 11.7% year-over-year. Free cash flow was $1.85 billion compared to $1.19 billion the same quarter a year-ago.
Like Facebook, Amazon knocked Q1 estimates out of the park. Earnings per share of $1.07 crushed the Zacks Consensus estimate of $0.61. Revenues came in at $29.13 billion, topping the Zacks Consensus Estimate of $27.94 billion and increasing 28.2% year-over-year.
Amazon Web Services (AWS), their cloud computing and services platform, brought in $2.56 billion in revenue during the first quarter, reflecting growth of 64% year-over-year. And, after expenses, AWS drove $604 million in operating income, up over 200% from the same quarter last year. No figures on the company’s Prime membership were reported, but the subscription service has been growing steadily at over 50% over the last two years.
Netflix Inc. (NFLX)
Netflix also impressed with reported earnings per share of $0.06—surpassing the Zacks Consensus estimate of $0.03. Revenues rose 24.4% year-over-year to $1.95 billion thanks to higher revenues from both international and domestic streaming but fell behind our consensus estimate of $1.96 billion.
In the quarter, Netflix recorded 6.7 million new members, up significantly compared with 4.9 million in the same quarter a year ago. Now, the company has a total of 81.5 million subscribers across the globe. Paid members came in at 77.7 million, up from 59.6 million in the same quarter a year ago.
Of concern, however, is operating income for both its streaming and DVD businesses. It plummeted 49.5% year-over-year to $49 million, though net income came in at $28 million, up from $24 million in the same quarter a year-ago.
Alphabet, Inc. (GOOGL)
Formerly known as Google, Alphabet reported weaker than expected Q1 results but they are still making money hand over fist. Adjusted earnings per share of $6.02 missed the Zacks Consensus Estimate of $6.36. Revenues came in at $16.47 billion, increasing 17% year-over-year but falling 5% sequentially. Sales just missed our consensus estimate of $16.51 billion.
Bottom Line for Investors
As long as the FANG titans continue to grow their businesses and deliver earnings, the danger of seeing huge plummets in stock prices should be mitigated. At the same time, each company trades at very high multiples so it’s hard to justify taking a new concentrated position in any of them at such a high price. Better to diversify that risk away.