Time To Ditch The FANG Trade?

• 720 Global believes that the FANG stocks are incredibly overpriced.
• The four stocks would need unrealistically huge earnings boosts to justify their current valuations.
• Timing an irrational market can be difficult, and 720 Global does not recommend shorting the FANG stocks at this time.

In a new report, 720 Global discusses the FANG trade and why now is a good time to become de-FANGed. FANG is an acronym used to describe four of the largest high-growth tech stocks in the world: Facebook Inc FB, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet Inc GOOGL's Google.

Absurd Valuations

The performance of the FANG stocks says a lot about the mentality of the current market. The S&P 500 has been essentially flat since June, but the FANG stocks are up on average about 40 percent during that time.

One of the most basic valuation metrics used to identify the fundamental value of a stock if the P/E ratio. The S&P 500's overall P/E ratio currently sits at 18.6. 720 Global took a look at exactly how much of an earnings change each of these four names would need to drop their respective P/E's down only to the market average. All four companies would need an earnings boost of at least 81 percent to be valued similarly to the rest of the market.

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Netflix would need to increase its income by 1,752 percent, while Amazon would need to see income more than six times its current level.

Amazon And Netflix

While Amazon is likely in position to boost margins in the future, it still has a lot of work to do to get to a reasonable valuation. "If we make the huge assumption that they can improve their margins to be similar to Walmart (5.5%), Amazon would still need to almost triple revenue to become fairly valued versus the S&P 500," 720 Global explained.

At its current subscription pricing, Netflix would need to up its total number of subscribers from 69 million to 659 million to bring its P/E ratio down to 18.6.

Recommendation

Despite the overvaluations, markets can remain irrational for years, and shorting these stocks can be a difficult trade to time. "Even though we believe it will be the right call when the market finally comes to its senses, we do not have the iron stomach required to recommend shorting these stocks," the report concluded.

Disclosure: the author holds no position in the stocks mentioned.