Investors may be a little worried about the near-term future for Netflix Inc. after the company posted disappointing second quarter subscriber numbers on Monday. But analysts don’t seem all that concerned about the online television giant or other FANG stocks, as they’ve proven their resiliency time and time again, and continue to offer the growth much of the market is looking for.
Netflix kicked off earnings seasons for the group that also includes Facebook Inc., Amazon.com Inc. and Google parent Alphabet Inc. with results that sent its shares tumbling as much as 14 per cent, before rebounding.
The other FANG stocks didn’t budge.
“The one problem with being a high-flying stock is that high momentum brings high expectations and any sign of trouble sends the fast money jumping off the bandwagon in a big hurry,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Netflix’s net streaming subscriber additions of 5.15 million in the quarter fell 17 per cent short of guidance. But rather than portending a bigger problem, the subscriber weakness (that was accompanied by healthy earnings) was blamed on factors such as adverse seasonality and the timing of new content.
“Second quarter results show that Netflix will not build subscribers in a straight line,” said Doug Anmuth at J.P. Morgan, hiking his target to US$415 from US$385. “Netflix is still figuring out the right balance of content spend and marketing.”
BMO Capital Markets analyst Daniel Salmon upgraded Netflix to outperform from market perform, noting that as the clear leader in the streaming market, the company still has room to grow.
“We also do not believe Monday’s results suggest a material change in the long-term trajectory, and we do believe there are some, if not game-changing, intriguing new investment considerations that can power the stock back to highs and perhaps beyond,” Salmon said.
We do believe there are some, if not game-changing, intriguing new investment considerations that can power the stock back to highs and perhaps beyond
MO Capital Markets analyst Daniel Salmon
The S&P 500 has risen 4.5 per cent so far in 2018, and all the FANG stocks are up much more than that. Yet there is a growing gap between Amazon (up 55 per cent) and Netflix (up 86 per cent), and the two digital ad giants Facebook (up 17 per cent) and Alphabet (up 14 per cent).
Nonetheless, the FANGs are still the place to go for growth.
Canaccord Genuity analyst Michael Graham found 19 large cap tech stocks with projected organic revenue growth in 2018 greater than 15 per cent. Four of them — and among the fastest growers — are the FANGs.
“FANG stocks continue to occupy much of the growth landscape within tech,” Graham said. “The outlook for tech is still solid, but the short term may be more volatile.”
That’s largely because of valuations, as the tech sector recently started to touch its historical average of approximately 1.2x the S&P 500. When measuring relative P/E for the sector over the past three years, it looks even more expensive, as it is approaching the point it was at prior to the last recession.
“The FANG stocks have achieved wide levels relative to their moving averages, and the charts in general look like a lot of good news is priced in,” Graham said.
That suggests any hiccups could cause big market moves as these tech giants roll out their latest results. Alphabet is up next with earnings on July 23, followed by Facebook on the 25th and Amazon on the 26th.
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