Analyst: FANG Stocks Growth Fundamentals Remain Relatively Strong

The all stars of the 10-year bull market in U.S. stocks have been the so-called FANG group: Facebook, Inc FB, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet, Inc. GOOG GOOGL.

While these four massive tech stocks led the market higher in recent years, they have also led it lower in the past three months.

Fall's Fall

Each of the four FANG stocks is down at least 14 percent since late August compared to about a 7 percent decline for the S&P 500. Bank of America analysts Justin Post, Nat Schindler and Akshay Bhatia said in a Nov. 26 note they're still seeing rotation out of FANG stocks, but the companies' growth fundamentals remain relatively strong.

The primary near-term concerns for FANG investors have included margin pressures, regulatory headwinds, slowing revenue growth and rising costs. Post said the FANG stocks remain dominant within their respective industries, however, and Bank of America sees only a 10 percent chance of a U.S. recession within the next year.

Recession Looming?

Consensus analyst estimates suggest the average revenue growth among the FANG stocks will drop from 32 percent in 2018 to just 22 percent in 2019, but the overall consensus 2019 revenue growth estimate for the S&P 500 is just 6 percent.

Post said investors are certainly right to be concerned on the potential impact a recession could have on FANG stocks within the next few years.

During the 2008-2009 recession, tech sector earnings multiples compressed to as low as around 13 times. Regulatory concerns have already driven the 2020 estimated earnings multiple of Facebook and Alphabet close to the overall market average, eliminating the premium valuation these stocks have enjoyed for years.

Buy The Dip

But while market volatility and economic cycles are unpredictable, Post says FANG fundamentals are still impressive relative to the rest of the market.

“Despite recent stock weakness, core fundamentals such as growing video viewership and online shopping are intact, and we continue to like the group on a relative growth basis,” Post said.

Bank of America has the following ratings and price targets for the FANG group:

• Alphabet: Buy rating, $1,350 target (both share classes).
• Facebook: Buy rating, $190 target.
• Amazon: Buy rating, $2,000 target.
• Netflix: Buy rating, $440 target.

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