How Rich Would You Be If You Had Invested US$100,000 In FAANG Stocks A Year Ago?

Investing

How Rich Would You Be If You Had Invested US$100,000 In FAANG Stocks A Year Ago?

Tech stocks have been on a tear over the past year. Here we reveal how much you would have gained if you had invested US$100,000 in the top tech giants 12 months ago.

Published on 20 November 2017

The S&P 500 index has risen from 2,182 a year ago to its current level of 2,579 – a gain of 18% in 12 months. The surge in share prices has been led by technology stocks. Jim Cramer, an American television personality who hosts CNBC’s Mad Money show, coined the acronym “FAANG” to represent the leading companies in the tech sector.

The five FAANG stocks – Facebook, Apple, Amazon, Netflix, and Alphabet, which is Google’s parent – have all delivered high returns to investors in the past year. What is the reason for the skyrocketing valuations that the market has given these stocks?

While rising revenues and profits and a rapidly growing customer base have contributed to the increase in share prices, many investors believe that the best is yet to come. That is how they justify a price-earnings (P/E) ratio of 285 for Amazon and 195 for Netflix. The P/E ratio of the S&P 500 index is only 24.4 – and many analysts believe that at this level, the market is overvalued and is due for a correction or even a crash.

But the FAANG story remains largely intact. If you had bought one of the FAANG stocks exactly a year ago, you would have made a return of between 34% and 68%.

Facebook

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In its 13 years of existence, Facebook has emerged as the clear global leader in the social media space. Early rivals included firms like Friendster and MySpace – which are companies that nobody even remembers now.

During the third quarter of this year, Facebook’s “monthly average users” ­– a metric that measures the number of unique users in a 30-day period – rose to a staggering 2.07 billion. That’s about 27% of the world’s population.

The company’s mainstay is its advertising revenues. The growth in ad income shows no signs of slowing. In the three months to September, revenues from advertising rose by 49% to US$10.1 billion on a year-on-year basis. Mobile advertising, which is a key growth area, accounted for 88% of ad revenues.

With companies like WhatsApp and Instagram in its portfolio, Facebook’s rapid expansion is likely to continue.

Apple

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When Apple’s legendary founder, Steve Jobs, died in 2011, many analysts predicted that growth of this tech giant would slow down. But the company has proved the naysayers wrong.

The iconic iPhone has sold more than a billion units in its 10 years of existence. In the September quarter alone, 46.7 million iPhones were sold. The recent launch of the iPhone X is expected to give sales a further boost.

But Apple does not rely solely on hardware for its revenues. Its income from the services segment has been rising rapidly. AppleCare, Apple Pay, the AppStore, iTunes, and Apple Music together contributed US$24.3 billion to sales in 2016.

A major strength of the company is its cash pile of US$260 billion. This amount is far greater that the market cap of many large tech firms.

Amazon

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Why does Amazon’s stock command a price-earnings ratio of 285? One reason could be its stranglehold over e-commerce in the US. Its online sales have a 50% share of the total market. Revenues in the third quarter of this year totalled US$43.7 billion. The company expects its fourth quarter sales to be between US$56 and US$60.5 billion.

Amazon Web Services (AWS), which accounted for only US$4.6 billion in sales in 3Q 2017, provided US$1.2 billion in profits. This helped to offset the operating loss of US$820 million that the e-commerce segment made.

Despite the company’s low profitability, investors have driven share prices up by 49% in the last 12 months.

Netflix

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Among FAANG stocks, Netflix has provided the highest returns in the last 12 months. Analysts believe that the rapid pace at which the company is adding new subscribers will lead to a significant increase in profitability in the future.

Netflix currently has 109.3 million subscribers. In the last quarter, it added 850,000 in the US alone. Customer acquisition at the global level has spiked sharply with 4.45 million new international subscribers signing up for Netflix in the third quarter of 2017.

In the recent past, consumer tastes have shifted away from movie theatres and television and moved towards the internet. Netflix has successfully positioned itself to take advantage of this change.

Google

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Google parent company Alphabet’s success is based on its ubiquitous search engine, which has a market share of over 90% in search. Microsoft’s bing comes in at a poor second with 2.75%. The popularity of Google’s search engine has provided the company with a steady stream of consistently growing ad revenues. In 3Q 2017, advertising sales totalled US$24 billion, accounting for almost 90% of the firm’s total revenues.

The company also owns the highly successful video-sharing site YouTube and is ploughing its profits from its traditional business into a number of “moonshots” – tech businesses that could be wildly successful, but which are unlikely to provide short-term profits. These moonshots include Calico, a venture that is trying to tackle the “challenges of ageing and associated diseases” and Waymo, a driverless car project.

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The bottom line

How long will the FAANG boom last? Although each of the FAANG companies has a sound business model and substantial cash flows, share valuations cannot go on rising forever. Commenting on the booming stock market in The Money Game, George J.W. Goodman wrote that the timing of the collapse of the market is impossible to predict – it’s like being at a party which will end at midnight “but none of the clocks have hands.”

The current party is likely to continue for some more time, but when the market changes direction, FAANG stocks will likely also see falling valuations. Until that happens, investors can continue to gain from rising share prices.

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