As an investor, it's easy to become overwhelmed by the amount of data at your disposal. Corporate earnings releases and economic data make it easy to potentially miss important announcements. On Monday, Aug. 14, one of those important data releases may have slipped below investors' radars.
August 14 marked the last day for fund managers with at least $100 million under management to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot of what stocks and exchange-traded funds the top institutional investors and hedge funds were holding in the most recent quarter. In other words, it's a way for everyday investors to see what Wall Street's smartest investors have been buying and selling.
The latest round of 13Fs showed some very interesting buying and selling activity among the popular FAANG stocks.
Image source: Getty Images.
By "FAANG," I'm referring to:
- Facebook, which is now a subsidiary of parent Meta Platforms (META 0.43%)
- Apple (AAPL -0.35%)
- Amazon (AMZN 3.43%)
- Netflix (NFLX -0.63%)
- Google, which is now a subsidiary of parent Alphabet (GOOGL 10.22%) (GOOG 9.96%)
Over the trailing decade, the FAANG stocks have vastly outperformed the benchmark S&P 500 and are primarily responsible for the huge rally in the Nasdaq Composite on a year-to-date basis.
These five companies are also leaders within their respective industries. For instance, Meta Platforms owns four of the world's most popular social media destinations (Facebook, WhatsApp, Instagram, and Facebook Messenger), which helped it draw 3.88 billion unique monthly users in the second quarter. Meanwhile, Netflix dominates domestic and international streaming service market share. Buying leaders with impenetrable moats or first-mover advantages has often been a smart move for investors.
However, billionaires have a mixed view of the FAANG stocks -- at least based on recently filed 13Fs. One of the priciest FAANG stocks was an exceptionally popular buy, while two perceived values were pretty aggressively sold by billionaire money managers.
The sensationalist FAANG stock billionaires are buying hand over fist: Apple
Among the five FAANG stocks, the one that billionaire money managers couldn't stop buying in the June-ended quarter is tech giant Apple. All told, a half-dozen billionaire investors piled in, including (number of shares purchased in Q2 listed in parenthesis):
- Jim Simons at Renaissance Technologies (4,912,234 shares)
- John Overdeck and David Siegel at Two Sigma Investments (1,003,490 shares)
- Israel Englander at Millennium Management (559,040 shares)
- David Tepper at Appaloosa Management (480,000 shares)
- Ken Fisher at Fisher Asset Management (417,648 shares)
Billionaires' love of Apple likely has to do with its brand, innovation, and capital-return program. In terms of the former, Apple is viewed as one of the most recognized and valuable brands in the world. Its exceptionally loyal customer base has translated into big-time sales growth.
With regard to innovation, Apple is delivering from a physical product and subscription services standpoint. The company's iPhone is far and away the leading smartphone sold in the United States. Meanwhile, Apple's services revenue continues to grow by the quarter and should provide a way to minimize sales fluctuations often seen during iPhone replacement cycles.
It also doesn't hurt that Apple has repurchased around $600 billion worth of its stock since the beginning of 2013. A reduced outstanding share count has helped lift Apple's earnings per share over time.
But when push comes to shove, Apple is one of the priciest FAANG stocks. It's trading at roughly 24 times cash flow, yet is fully expected to report a low-single-digit decline in sales and profits for fiscal 2023 (Apple's fiscal year ends in late September). What makes this sales decline even more eye-popping is that inflation has been well above-average. Even with meaningful pricing power and innovation as tailwinds, Apple's growth engine has stalled.
FAANG stock No. 1 billionaire investors are surprisingly selling: Alphabet
On the other side of the aisle, billionaire fund managers were surprising big-time sellers of Alphabet, the parent company of internet search engine Google, streaming platform YouTube, and autonomous vehicle company Waymo. Four prominent billionaires were sellers of Alphabet's Class A shares (GOOGL), including (number of shares sold in Q2 listed in parenthesis):
- Chase Coleman at Tiger Global Management (4,551,949 shares)
- Dan Loeb at Third Point (3,325,000 shares)
- Steven Cohen at Point72 Asset Management (3,299,177 shares)
- Ray Dalio at Bridgewater Associates (348,344 shares)
The most logical reason for billionaires to be skeptical of Alphabet in the short term is the company's reliance on advertising for the bulk of its revenue. Though the U.S. economy has proved more resilient than most people expected, numerous economic data points and predictive tools still suggest that a downturn is likely. Advertisers are usually quick to reduce spending at the first signs of weakness, which wouldn't be good news for Alphabet.
However, this is a relatively short-term concern for a company that's cheap and dominating in so many other aspects. For example, internet search engine Google has accounted for no less than 90% of worldwide search share every month for more than eight years. Its moat appears impenetrable, giving the company a rock-solid foundation to generate operating cash flow.
We're also seeing plenty of momentum from Alphabet's operating segments beyond Google. YouTube is the second-most-visited site globally and has seen daily YouTube Short views skyrocket. Meanwhile, Google Cloud has delivered back-to-back quarters of operating profits and controls approximately 9% of the worldwide cloud infrastructure service market share. Keep in mind that enterprise cloud spending is still in its early stages.
Lastly, Alphabet is cheap. Over the past five years, Alphabet's stock has traded at a multiple to cash flow of a little over 18. Investors can buy the stock's Class A shares right now for less than 14 times Wall Street's consensus cash flow for 2024.
Image source: Amazon.
FAANG stock No. 2 billionaire investors are surprisingly selling: Amazon
The second FAANG stock that endured big-time selling pressure from billionaires during the June-ended quarter is e-commerce company Amazon. A whopping 10 prominent billionaire asset managers were busy pressing the sell button, including (number of shares sold in Q2 listed in parenthesis):
- Jim Simons at Renaissance Technologies (8,999,016 shares)
- Terry Smith at Fundsmith (6,777,831 shares)
- Chase Coleman at Tiger Global Management (5,989,891 shares)
- Ole Andreas Halvorsen at Viking Global Investors (3,226,907 shares)
- Stephen Mandel at Lone Pine Capital (1,709,767 shares)
- John Overdeck and David Siegel at Two Sigma Investments (1,443,520 shares)
- Israel Englander at Millennium Management (1,159,561 shares)
- Steven Cohen at Point72 Asset Management (994,294 shares)
- Ken Fisher at Fisher Asset Management (678,708 shares)
As with Alphabet, the likeliest reason for this selling is the expectation of economic weakness. Most of Amazon's revenue derives from its world-leading online marketplace. If the U.S. economy and/or China continue to weaken, consumers may be less willing to open their wallets.
The other issue for Amazon is its valuation. Even looking out to 2024, Amazon is sporting a lofty multiple of 43 times forward earnings.
However, valuing Amazon based solely on its e-commerce marketplace is a terrible idea. Although it's the company's top revenue generator, online retail sales offer very low margins. By comparison, three of Amazon's ancillary segments generate virtually all its operating income -- subscription services, advertising services, and Amazon Web Services (AWS).
Without question, AWS is the most important operating segment for Amazon. Despite only accounting for around a sixth of net sales, AWS is responsible for $10.5 billion out of Amazon's $12.5 billion in operating income through the first six months of 2023. As noted, enterprise cloud service spending has a long growth runway.
Amazon is also historically inexpensive relative to its cash flow. While the price-to-earnings (P/E) ratio is helpful when valuing slow-growing businesses, a company like Amazon, which reinvests most of its operating cash flow, is best valued by analyzing its cash flow. After trading at a year-end multiple of 23 to 37 times cash flow from 2010 through 2019, Amazon looks like an amazing deal at just 12 times forward-year cash flow, based on Wall Street's consensus.
