The stock market has proven to be practically unstoppable since finding its bottom in March 2009. Aside from a few minor hiccups, the 122-year-old Dow Jones Industrial Average and broad-based S&P 500 more than quadrupled from their lows. However, the real star of the show has been the technology-heavy Nasdaq Composite, which more than quintupled from its March 2009 lows on its way to an all-time record high this year.
Leading the charge for the Nasdaq are the so-called FAANG stocks -- that's Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google, which is now part of parent company Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL). Originally, this group was simply known as "FANG," without Apple. But it's pretty hard to exclude the king of tech when talking about market-leading growth stocks. Thus, the updated acronym "FAANG."
FAANG stocks take a licking
The reason FAANG stocks receive so much attention from Wall Street and investors, aside from their large market caps, is because they're leaders. They've been outperforming the broader market pretty consistently for a decade, and their leadership is considered pivotal to pushing the stock market higher. In fact, FANG stocks (excluding Apple) were responsible for half of the S&P 500's year-to-date gains through the first week of August 2018.
However, since hitting their highs either this summer or in the early fall, the FAANG stocks have looked, in an apropos sense, de-FAANGed. Through Monday, Nov. 19, here's how much market value has been lost by each of the FAANG stocks:
- Facebook: $209 billion lost
- Apple: $226 billion lost
- Amazon: $263 billion lost
- Netflix: $67 billion lost
- Alphabet (Google): $176 billion lost
Add that up and we're looking at $941 billion in aggregate market cap lost since these companies hit their all-time intraday highs. That's nearly $1 trillion in value wiped away in a matter of months.
Why have FAANG stocks lost their bite?
What the heck happened, you ask? It looks to be a combination of a number of factors weighing on these leading growth stocks.
For starters, investors tend to have very lofty sales and/or profit expectations for the FAANG stocks, so when one or more of them fails to live up to expectations, the group tends to be bulldozed by Wall Street. In recent months, Wall Street has been skeptical of a number of these FAANG stocks following their quarterly results.
For instance, Facebook suffered its worst day as a public company back in July, losing roughly a fifth of its value at the time (about $120 billion). The impetus was the release of the company's second-quarter operating results, which highlighted rising expenses, weaker-than-anticipated sales growth, and a user-base decline in Europe. It was an uncharacteristically bad quarter for Facebook, and Wall Street let the company know it.
Since Facebook's poor quarterly results, we've witnessed Amazon and Apple issue holiday season sales guidance that was deemed subpar by Wall Street, causing both stocks to be hit. Alphabet, while not hit nearly as hard, also disappointed investors with higher traffic-acquisition costs, which led to a consensus revenue miss in the third quarter.
Secondly, emotional and/or historical factors could be at play. Investors know for a fact that nothing goes up in a straight line, and FAANG stocks have greatly outperformed the broader market for a decade. Even with Netflix's most recent operating results demonstrating strong subscriber growth, it also dove from its recent highs. Pullbacks are healthy, and it's been a while since the FAANG stocks have undergone a collective correction.
Third, blame the economy. While the idea might sound silly, things are almost too good right now. U.S. GDP growth hit its highest level in nearly four years during the second quarter; the unemployment rate is at a 49-year low; and corporate America received one heck of a tax cut via the passage of the Tax Cuts and Jobs Act in December 2017. But with the market being forward-looking, investors might be struggling to see how things get even better.
FAANG stocks traditionally trade a premium for a reason: their superior growth. But if interest rates keep rising, it makes borrowing more expensive, which could slow corporate expansion. Low unemployment rates also mean workers having more wage-pricing power, leading to higher expenses for companies of all sizes. And on the corporate tax front, the bulk of savings have already been realized, leaving investors to question where the next catalyst will come from.
FAANG stocks: Mostly cheaper than they've ever been (on a cash-flow basis)
To be clear, I'm a fan of a healthy pullback in all stocks from time to time -- even market leaders. Since hitting their highs, shares of Facebook, Apple, Amazon, Netflix, and Alphabet have declined by 40%, 20%, 26%, 36%, and 20%, respectively. And while these are stocks that, traditionally, aren't cheap on a fundamental basis, most have metrics headed firmly in the right direction.
As an example, Amazon has never been much for maximizing its profits. Rather, it's a company that seeks to generate as much operating cash flow as possible, which is then reinvested back into its existing businesses and new side projects. Over the past five years, Amazon's average price-to-cash-flow reading has been 30.4. However, according to Wall Street, Amazon is on track to generate $147.90 per share in cash flow by 2021. That would place it at a multiple of less than 11, which, given its propensity to reinvest in its business, would make it incredibly cheap by historical standards.
As for Facebook, it's averaged a price to cash flow of 31.7 over the past five years. Yet Wall Street has the company earning $12.47 in cash flow per share by 2020, which would also place it at a multiple of less than 11 times cash flow per share. Facebook looks to be a bargain.
The lone question mark of the group is Netflix, which continues to generate annual cash outflows rather than inflows. On the bright side, profits will double from 2017 into 2018, then nearly double again in 2019, and then double again by 2021 -- at least according to Wall Street. If Netflix can keep continuing to hit its subscriber numbers, investors may be able to overlook its liberal spending habits.
In other words, this "deFAANGing" may be an opportunity to go shopping.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.