Given the abrupt and surprising declines in so-called FAANG stocks starting Friday and extending into Monday, it’s time for an objective assessment of fair value for each of the companies.
To begin, the companies are not the same; there are material differences. The companies are Facebook FB, -1.68% Apple AAPL, -3.73% Amazon AMZN, -1.77% Netflix NFLX, -4.66% and Google GOOG, -1.46% GOOGL, -1.77%
However, there is a resounding similarity in that, together, they have been the driving force behind the Nasdaq 100’s NDX, -1.11% rise this year. That relationship has prompted analysts to lump them together. And, until Friday, investors were buying the stocks in tandem, but as we learned, that can be risky.
A few weeks ago I warned my clients that this buying could continue, but because of the focused nature of the rally, any selling in FAANG stocks could cause eye-opening declines without hurting the broader market.
My warning fell on deaf ears because the buying did not stop until Friday. Interestingly, the buying may not stop for long even after this recent setback. The European Central Bank (ECB) continues to print the equivalent of about $60 billion a month, and the money needs to go somewhere. Reasonably, the focus may no longer be on this select few stocks, like it seemed to be all year, but the fabricated liquidity is still flowing.
Central bank capital infusions dating back to 2013 are exactly what caused this asset bubble, and the liquidity injections have not stopped. This bubble will burst, but probably not today, and the recent selling in FAANG stocks does not appear to be a precursor to an impending market crash.
Looking at the stocks as a group, their influence on the market is tangible, but they have very different relative valuation metrics. For example, Facebook has an immediate and relatively exceptional valuation while Amazon is at the other end, and has virtually no value at these prices.
In between, Apple lacks immediate value, while Netflix is fairly valued, and Google will likely demonstrate an oddity in earnings growth in calendar 2017 that will not be resolved until 2018, distorting its immediate fair value.
All told, these stocks absolutely have had strong influence on the market. Still, their cohesive relationship is likely to come to an end as a result of the recent tech fallout, but this is not the beginning of a market crash. This could be a precursor to a crash that begins in the months ahead, but that all depends on liquidity.
I will, of course, continue to monitor that closely and communicate everything that I see to clients. For now, the money is flowing like water, and it will need a home; asset-buying interest has not stopped.
As far as the stocks’ fair value, I have provided details on each one with corresponding graphs and charts to help you understand their differences, and the difference in their fair-value assessments accordingly. Here they are: