Is FANG Overvalued?
Question: The hot stock combo right now is FANG (Facebook, Amazon, Netflix and Google.) What is the PE ratio of a portfolio equally weighted in these four stocks?
Provide an opinion about whether future earnings of prospects for FANG justify this valuation?
Calculation of the FANG PE ratio:
All FANG stocks have positive earning and positive PE ratios so it is appropriate to average PE ratios of the four stocks to obtain the PE ratio for the portfolio. (I use a weight of 0.250 for each stock and SUMPRODUCT weight vector with PE ratio vector)
| FANG STATISTICS | ||||
| PE ratio | Dividend | EPS | Price | |
| 38.29 | 0 | 3.93 | 150.58 | |
| Amazon | 183.95 | 0 | 5.31 | 976.78 |
| Netflix | 195.38 | 0 | 0.77 | 151.03 |
| 31.34 | 0 | 29.59 | 927.33 | |
| FANG | 112.24 | |||
This gives me a PE ratio of 112.24 for FANG.
It is instructive to compare the recent growth of EPS and stock price for the FANG companies
| Comparison of growth of EPS and stock price for FANG Stocks | ||||
| 6/29/16 | 3/30/17 | % Change | ||
| FB | EPS | 0.97 | 1.04 | 7.2% |
| Price | 114.28 | 142.05 | 24.3% | |
| AMZN | EPS | 1.78 | 1.48 | -16.9% |
| Price | 725.68 | 886.54 | 22.2% | |
| NFLIX | EPS | 0.09 | 0.4 | 344.4% |
| Price | 96.67 | 147.8 | 52.9% | |
| GOOG | EPS | 8.42 | 7.73 | -8.2% |
| Price | 699.2 | 829.56 | 18.6% | |
Some Observations:
In three of the four companies the growth of stock prices exceeded the growth of earnings per share.
In two of the four companies, earnings fell while the stock prices rose.
In Netflix, the one company where EPS growth exceeded stock price, the initial period stock price was near zero. The initial low level of earnings is why the PE ratio of Netflix is going down. When earnings are near zero the PE ratio can be astronomic.
Concluding thoughts: Basically FANG stock price is rising because of expectations of future growth not concrete earnings growth. The one exception Netflix is because of really low earnings in a base period. Netflix has done a great job but it is in a competitive industry and unlike the other three companies has no monopoly power.
These four companies will face challenges going forward. The PE of Amazon seems especially high because there is going to be a lot of competition in the cloud sector a lot of costs integrating Whole foods and low margins in the on-line grocery business.
Investors who own FANG should consider taking some profits.
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