Disclaimer: I am not a finance professional. I hold no licenses to trade or manage money. Do your own due diligence when investing your money. These views and opinions don’t necessarily reflect the views and opinions of CLNS Media.
On my personal blog, I like to share my technical analysis on certain stocks and the overall market. That’s a fun hobby, but a technical buy signal in a stock doesn’t always mean that the company is sound fundamentally. I don’t think I need to get into my technical perspective on the FAANG stocks. I’ve made my feelings on the overall market no secret on this site. And since Wall Street was so reliant on FAANG performance this year, I think it’s pretty obvious that I’m bearish at the moment. But what about fundamentally? Whether you believe this is just a correction or the beginning of a bear market, when all the dust settles, do we want to own stock in any of these companies beyond the exposure that many of us already have in an ETF or a retirement fund? Let’s look at each company individually.
Here’s a bold prediction: thirty years from now, our kids and grand-kids are going to wonder how we got so addicted to social media. Checking Instagram daily or God-forbid even hourly will be a thing of the past. I’m a firm believer that we’ve already hit peak social media. And I think Facebook is going to be the first big, glorious casualty. For full disclosure, I previously covered Facebook in April of this year HERE. I have since changed my feeling on the long-term prospects of the company and not for the reasons you might think.
As I alluded in my April post, the Cambridge Analytica scandal was kind of silly to me. If you didn’t know that Facebook was leveraging your personal data to make money, you can stop reading this article; everything is going to be way over your head. I don’t care about the Russian bot accounts either. That is also silly to me. Facebook has had bot account issues since the company started. Many who were outraged about the bots started caring now because they still can’t get over 2016. But that’s a conversation for another time…
There are two big issues that I see moving forward with Facebook: consumer sentiment and legislative headwinds. A Pew study determined that 1 in 4 Americans deleted the Facebook app from their phone in 2018. That’s huge and indicative of a serious lack of trust between the company and the users of the service. Interestingly enough, it isn’t just younger users who are walking away from Facebook, it’s every age group and demo according a study done by Edison Research. That study cites the three biggest reasons for the usage declines as distrust, discord, and disinterest. Yowza. It’s one thing when you breach trust with your users. That can be fixed over time. When the people have lost interest in the user experience all together, that might be a little tougher to change.
Now, Facebook still has other products that are hugely popular like Instagram and that is all well and good. But social media users can be temperamental. Heck, just today everyone started freaking out about an accidental change to the Instagram interface. We also saw a negative change in usage with Snapchat this year. The point is, people can be very volatile with their loyalties and I think we’ve hit peak social media.
Lastly and maybe most importantly, don’t count out legislation from the overlords in Washington. When these people get back “to work,” they’re going to look for a regulatory win that they think will placate their voters. Facebook did a terrific job this year of painting a “legislate me” sign on its back. It’s hard to imagine any meaningful legislation of Facebook that isn’t revenue-prohibitive. Good luck, Zuck.
Verdict: staying away.
There was actually some very interesting news from Amazon out earlier this month regarding a category of products that the company will no longer sell. Dubbed “CRaP” products because the company “Can’t Realize a Profit,” Amazon intends to stop taking losses on transactions that involve items like bottled water or soda because they’re so expensive to ship. When you’re an Amazon Prime member and you get free shipping, it’s easy to see how a company can take a loss on the sale of a heavy item. Will people cancel Amazon Prime memberships because of this? I’d guess probably not. But only time will tell.
Anytime you can cut lower margin sales from your business in favor of higher margin sales, it’s a good thing. If you can cut out negative margin sales, even better. Truthfully, it’s hard for me to establish a strong bear case for Amazon on the surface. You’d have to convince me that e-commerce is going to slow down or that an insurgent is about to steal market share for me to completely lose interest in Amazon. However, purely from a value perspective, I can’t justify buying Amazon here. It’s currently trading at over 17 and a half times book – that makes it the second most expensive FAANG stock after Netflix.
Verdict: I want to see how the next 12-24 months shake out from a macro perspective before I’d throw any money into Amazon at this valuation.
A couple weeks ago, my wife and I were watching a CBS Sunday Morning piece about the fall of Sears. It was a great watch, and admittedly, I didn’t realize just how innovative Sears actually was all those decades ago. The craziest part about the death of Sears is that the company should have been able to pivot to e-commerce somewhat easily if leadership was even just a little bit forward-thinking. Long before Sears had B&M retailers, it was a catalogue business. Sears should have been able to flip that same kind of shopping experience online but didn’t. Pre-crisis, consumers couldn’t have possibly imagined that Sears would be bankrupt just a decade later. But here we are.
When the CBS report was over, my wife and I hypothesized which strong companies today could struggle like Sears in the future. The first one that popped in my mind was Apple. It will probably seem insane to most that Apple, like Sears, could go the way of the dodo bird, but hear me out:
It’s not a mystery that smartphone sales are now sliding globally. Apple specifically announced that it won’t be sharing iPhone sales numbers in the future. Uhm, what? That’s a bad sign. This recent report by Forbes explains why Apple is in a tougher spot than previous years. The company is essentially offering big discounts on new iPhones so it can move units to close out the year. This is a strategy that Apple has not had to utilize in the past. And it isn’t just iPhones, as this Business Insider author points out, even buying a new MacBook isn’t necessarily a must in 2018.
So why the declining tech demand? I see two big reasons: 1) price. 2) features. The price for a new iPhone keeps going up every year yet the technology really isn’t advancing in any meaningful way for consumers anymore. This is why more and more people are hanging on to their old smartphones rather than spending a grand for a marginal upgrade.
When Steve Jobs came back to Apple in the late 1990’s, he saved a company that was struggling with declining sales and bad market share. Under his leadership, consumers were blessed with the iPod, the iPad, and the iPhone. That was New, Cool Apple. From the outside looking in, it appears that New, Cool Apple is gone. Case in point, the company announced the launch of AirPower in September of 2017 – AirPower isn’t even a true innovation. Samsung has already been providing the market with Qi pad charging for years. Regardless, with the company somehow incapable of getting it right, AirPower still isn’t on the market yet. That’s an incredible level of incompetency for a company as large as Apple.
Verdict: None of this means that Apple is going bankrupt like Sears. But it also doesn’t mean you need to buy the company’s stock today.
As a consumer, I really like Netflix. There are great viewing options for old favorites in addition to some really good new material that you can’t watch anywhere else. I’ve been a fan of a lot of the exclusive content that I’ve seen so far. This is important because ultimately the content is a huge part of the story for Netflix. To get this exclusive material, Netflix has taken on a massive amount of debt. As of Q3-2018, Netflix has piled on $8.3 Billion in debt. Nearly double the debt outstanding from just a year prior. It isn’t just the debt that is alarming to me, the cash burn is huge with negative free cash flow settling somewhere between $3 and $4 Billion for 2018.
And here’s the bad news for Netflix; some of the most desirable content that the streaming service currently has is almost certainly going away in 12 months. The Star Wars content. The Marvel content. Basically any of the Disney movies/programs that you see on Netflix will probably get pulled in a year when Netflix’s contract with Disney expires. I see almost no reason that Disney will extend that deal. Why should Disney leave money on the table and allow Netflix/Hulu to be middlemen content distributors? Disney doesn’t need Netflix and that’s why Disney is going direct to consumer with the Disney+ streaming service. It’s a fantastic idea and it’s going to hurt other streaming services like Netflix and Hulu. And not just from content perspective, but from a subscriber perspective as well.
I will admit, the company has seen nice growth in subscribers, but there’s more to it that needs to be assessed. Aside from the subscriber acquisition cost, Netflix isn’t even monetizing all of the streamers currently using the service. It is estimated that 35% of millennial streamers share passwords with friends/family. This is problematic for two reasons: 1) it represents $100’s of millions in revenue that Netflix is punting on. 2) it is creating an expectation of “free.” There’s no going back from that.
At some point, Netflix is going to have to either stop spending so much on content or properly monetize the customer base to get cash flow positive; ideally, the company will do both. That means the company is going to have to convert the streamers who aren’t paying. Or it is going to have to start supporting advertising. Given the current expectations from users, I don’t see either scenario playing out well. Especially if movies like Star Wars and Black Panther get pulled in a year.
Verdict: Until I see a huge move towards profitability in the business model, I’m not touching Netflix.
Like Amazon, I think the future prospects for Google are very good long term. Personally, I have more interaction with this company on a daily basis than I probably even realize; I don’t think I’m alone here. Between email, blogger, and just general web-searching during the course of my day, Google might actually have the biggest hold on me as a consumer than any other company. And it’s the only FAANG that is even in the conversation for that. I have no real attachment to Netflix. I deleted Facebook and Messenger from my phone and I never had Instagram. I think I buy something on Amazon once every 10 to 12 months. My laptop is a Dell. I do have an iPhone, but I’d go Android in a heartbeat for the right deal. Google on the other hand, I truly would miss it if it suddenly left my life.
Again, like Amazon, the valuation is tough for me. A price to earnings ratio of 38 is not cheap. Having said that, with a price to book ratio of 4.2, you could argue Google is one of the more affordable FAANG stocks. So, there’s that. Gun to my head and I have to pick a FAANG, it’d probably be Google – though there are plenty of non-FAANGs that I would rather buy before Google.
Verdict: not doing it.
There is a theme here that you may have picked up on if you were looking at the metrics under each name. These market darling stocks have had incredible bull runs. They are absolutely awesome in a growth environment. But I don’t know that I see a growth environment right now. In the cases of Netflix and Amazon, we’re talking about very expensive stocks from a price to earnings perspective. Netflix could even be fairly close to a solvency problem. Facebook and Apple look good on paper, with the later being the only FAANG that pays a dividend; I just don’t know that I trust the consumer loyalty for either company. I question the vision in Apple’s leadership. And I think Facebook’s best days are unequivocally behind them. Would I buy Google? Potentially. But if I’m investing my money in the stocks that I think present the best value as 2018 comes to a close, I’m staying away from all five FAANGs.