High valuations and trade concerns cap FAANG performance in Q1

FAANG stocks, known for their high beta attributes, dominated newsflow in the week after they added visible volatility to US stock markets.

The acronym FAANG that represents these stocks: Facebook Inc, Apple Inc, Amazon.com Inc, Netflix Inc and Google (Alphabet Inc) have considerable influence on US stock markets given their enormous market capitalisation.

These stocks have corrected due to their high valuations and after concerns emerged over the past few weeks that a possible trade war might erupt between the US and China.

Some of these stocks have ended the first quarter of 2018 in a negative note and while others such as Netflix and Amazon were still in positive territory for the year but developing concerns may put them on the defensive in the near term.

With the negative sentiment already having enveloped the stock market on the possible trade war, traders also took any negative news as cues to sell or short these big names.

A report that carried an unconfirmed rumour that US President Donald Trump was not happy with Amazon because several of his friends told him that the online retailer was killing shopping malls saw Amazon’s shares falling more than 4%.

The rumour materialised into news the following day after Trump used his Twitter account to criticise Amazon for not collecting state sales taxes for third-party sellers on its platform.

Earlier in the middle of March, Facebook also found itself in the middle of a data privacy scandal after UK-based company Cambridge Analytica harvested millions of Facebook users’ data to develop software to be used with political campaigns.

The two major news that affected some stock components of the FAANG group had given a strong negative catalyst for traders to sell down the rest of the FAANG basket of stocks as well.

Their negative performance had also spilled over into the wider markets worldwide with sentiment being affected.

The major technology stocks in China such as Baidu Inc, Alibaba Group Holding Ltd and Tencent Holdings Ltd had also seen their share prices react negatively even though there was no apparent negative impact to their operations from the latest development of their US peers.

“Traders could just be taking the excuse to sell and take profits first on the back of established and high valuations for some of these stocks.

“These stocks are growth and high-beta stocks after all,” a dealer says.

While some brokers are already reminding and prodding their clients that it might be a good time to buy into these battered down stocks, others were more cautious given the unrelenting long nine-year bull market that stocks markets have been in since the 2008 global financial crisis.

Following the eruption of the Cambridge Analytica data scandal concerns are now mounting that Facebook might see its profits lowered by the possibly increased regulatory actions by governments around the world.

According to Bloomberg Intelligence (BI) in a report on Wednesday, Facebook’s sales growth should be supported by Instagram and higher ad pricing but there’s a possibility that the data leak and the #deleteFacebook movement might crimp its profit.

“The larger effect of these changes may be felt on 2019 expectations as stricter data controls may slow the monetisation of WhatsApp and Facebook Messenger.

“Plans to boost expenses this year to combat information security concerns should bolster the platform in the longer term,” BI said in its report.

Equities research firm Aegis Capital Corp in a report says Facebook could emerge from this crisis in a cleaner and a good fundamental shape.

“While we highlight all the risks that could weigh on investor sentiment on the stock, our belief is that any user defections will be on the margin and unlikely to be material.

“Advertisers are focused on returns on investment (ROI) and all of our checks over the past few years have shown nothing but increasing ROI on the platform,” Aegis says in their report titled ‘This storm is likely to linger; but it should pass’.

It notes that Facebook’s Instagram continues to grow strongly with increased usage and higher ad loads, while Messenger is beginning to be monetised and WhatsApp has huge monetization potential that is similar to its Asian peers such as WeChat.

A high proportion of research houses or 91.7% of analysts polled on the Bloomberg have their “buy” calls on Facebook and these bullish calls are not unjustified because the stock is indeed a growth stock.

It has also been delivering with a forward price to earning ratio (PER) for Dec 2019 of 22.06 times.

Meanwhile for Amazon, BI notes that concerns on regulatory risks that may weigh on the company could possibly be overstated as its wider ecosystem, overseas Amazon Prime offering expansion and double-digit end-market growth should sustain expectations.

“Our litigation analysts see low antitrust risk for the company, with tax regulations a more likely outcome, despite Facebook’s data leak raising regulatory concerns for the sector,” it says.

Trading at a historical PER of 317.45 times and a forward PER of 172.18 times, Amazon is not exactly cheap but most analysts 94.1% still rate the stock a buy due to its growth prospects.

Ongoing trade war concerns aside, risk savvy investors could opt to pick up some battered down names which have their fundamentals and growth prospects still intact.

Indeed, once the clouds eventually clear on the potential risks of a trade war, these stocks would likely recover and see momentum pick up once again.