Let’s Talk About the FANG Stocks

Lots of people feel that the American market is deep into the entrails of another technology bubble. The leaders of this movement (Facebook $FB, Amazon $AMZN, Netflix $NFLX and Google $GOOG) are collectively known as the FANG stocks, and it’s undeniable that without their awe-inspiring upward mobility we wouldn’t be experiencing the extended bull market we’ve been enjoying the last decade or so. Add Apple and Tesla to the bunch, and you really have a who’s who of hot stocks in 2017. But all good things must come to an end…

Some analysts are bearish about the future of today’s tech stocks. America’s last tech bubble happened at the tail end of the 1990’s and lasted through most of 2000. You might remember companies like Petz.com and eToys.com, which are no more. More than a few analysts have pointed out that the FANG companies are trading much higher than their inherent values, the result of market hysteria and a whole bunch of amateur investors who think all these stocks can do is rise. That’s very similar to market sentiment in the dotcom era. But is this comparison really apt?

What FANG Has Going For Them That the DotCom Crash Companies Didn’t

The difference between what is and what has gone before is penetration and market share. By penetration, I mean the extent to which each of the FANG companies have permeated society. In the case of Facebook, it’s a layer under nearly everything you do with an electronic device. With Amazon, $1 out of every $2 spent online is spent here, and they’re killing retail. With Netflix, subscriptions continue to surge, they’re planning to spend $6 Billion in new content this year, and they’re still not available in some of the world’s largest markets. Finally, Google is at the heart of the internet, and they’ve got their fingers in so many other pies, it’s hard to think they won’t find further revenue sources.

But

But that doesn’t mean you should invest in them right this second. I predict that, should we experience a sharp economic downturn tomorrow, all four of these companies would likely survive. But those invested in them would lose a ton of money.

No one can say that we’re at the end of this bull run and that a decline is imminent. But I think it is safe to say that we’re closer to the end than the beginning. That said, congratulations to those who have been aboard the good ship FANG these last several years. May your returns be always so juicy. But I wouldn’t recommend anybody buying these stocks in June 2017. Next year’s growth will almost surely be significantly less than this year, and all of these stocks, from a value investor’s perspective, are overpriced at this moment.

One might reasonably buy and hold these stocks for decades, but a better plan for people looking for returns would be to identify the next Facebook or Netflix, companies that haven’t already neared the top of their mighty ascent.

If you already own these stocks, and you don’t plan to hold them for half a lifetime, think about selling. A company like Amazon is nearly priceless, but their valuation is built on buyer sentiment more than empirical value. Everyone wants it to be the next $1,000 stock, the first Trillion dollar company. These sentiments are excellent for investors in the very short term, but they’re not enough to buoy even a once-a-generation company in the event of a market correction.

In short, don’t be a fanboy. Be a rational investor. You might see something I don’t in the future of FANG, and if so, let me know. But for my money, I’m going to be on the hunt for innovation stocks with more meat on the bones.