For the past several years it was considered that buying any or all of the five FAANG stocks was a safe bet, as they kept hitting new highs despite various interruptions. But that may no longer be the case, now that the new year is here.
XThe FAANG stocks — Facebook (FB), Amazon.com (AMZN) Apple (AAPL), Netflix (NFLX) and Google-owner Alphabet (GOOGL) — long have been industry darlings, representing the biggest stocks in tech and the internet. While these shares sometimes fell during volatile periods, they always recovered from sell-offs and climbed to new highs.
Those days may be gone, says Daniel Morgan, a senior portfolio manager at Synovus Trust.
"As we go into 2019 just all kinds of things are moving around, creating headwinds," Morgan told Investor's Business Daily. "You just have to be a lot more discerning in terms of making sure that you're focused on themes that are still in play and going with the leaders in that group."
The tide in FAANG stocks began to change this summer, as the nine-year-old bull market began losing steam. That put the stocks in a precarious situation with their sky-high valuations. The last few months have been a rocky road for the group, which already are deeply in, or near, bear market territory.
The outlook darkened in November when Amazon, Apple and Facebook presented disappointing forecasts.
FAANG Stocks: Correction, China, Chip Concerns
Reasons for the drop in FAANG stocks vary. Some of it is part of a stock market correction triggered partly by rising interest rates. Another is the persistent fear of a deeper trade war with China. Also creating unease is the decline in chip stocks amid bearish sentiment in the sector.
Also of concern is a projected slowdown in spending on information technology. Research firm Gartner expects tech spending to grow 3.2% in 2019, to $3.8 trillion. That's down from expected growth of 4.5% this past year.
"I'm still cautiously optimistic," said Morgan. "But if GDP falls way off and we go into recession and tech projects are yanked, we're in trouble."
Here's a synopsis of what's ahead for the FAANG five in 2019.
It's been a rough year for Facebook, with dark clouds expected to carry into the new year. Among all the FAANG stocks, Facebook was hurt the most in 2018. Facebook stock has plunged roughly 38% since hitting a record high of 218.62 on July 25.
The hammer hitting Facebook hardest began with the Data Analytica privacy scandal that surfaced in February. Data privacy issues and combating fake news continue to hurt, causing some users to give up on the social network.
"We expect Facebook to remain the focus of considerable scrutiny from and criticism by governments and regulators around the world," Scott Kessler, director of equity research at CFRA Research, wrote in a report to clients.
Another headwind facing the company is user saturation. Facebook's daily user base in the U.S. has been the same for the past three quarters. Still, Facebook has several growth levers, the main one being Instagram, the company's photo and video-sharing app that continues to grow. Some analysts expect Instagram to be spun out of Facebook.
Amazon
Wall Street analyst John Blackledge at Cowen rated Amazon as his "best idea" for 2019, setting a price target on Amazon stock about 37% above where it currently trades.
"Several drivers that should yield solid global revenue growth with rising margins the next several years," he wrote in his recent note to clients.
Growth drivers include e-commerce expansion into large retail verticals, such as apparel and groceries, and expansion into global markets. Amazon's cloud-computing unit, Amazon Web Services, "should enjoy years of secular tailwinds."
But Amazon stock has tumbled about 26% since hitting a record high of 2,050.50 on Sept. 4, a day when the company's market valuation briefly topped $1 trillion.
Amazon's third-quarter earnings had its share of negative news, as revenue fell short of forecasts. Its fourth-quarter revenue forecast also missed estimates.
Growth levers in 2019 include Amazon Web Services, its dominant and fast-growing cloud computing unit. An AWS spinoff is a possibility.
Apple
Apple was bruised in 2018, with the stock skidding by roughly 35% from its record high of 233.47 on Oct. 3. Apple stock tumbled in early November after saying it would no longer release hardware unit sales. Investors saw that as a sign that iPhone unit sales would soon turn negative
Loup Ventures managing partner Gene Munster thinks Apple stock will be under pressure until late 2019 as the company becomes more like a services company rather than the famed hardware company it always was.
Soft iPhone sales and the U.S.-China trade war could continue to weigh down shares. To make up for softness in iPhone sales, Apple is focusing on services and wearables.
"We don't know what kind of company Apple will be five years from now," said Synovus Trust's Morgan.
In late December, Needham analyst Laura Martin lowered her price target on Apple stock to 200 from 260, but maintained a buy rating. Her reasons for the price cut included trade tensions with China, falling iPhone market share in India and rising interest rates.
Netflix
Netflix holds the pole position in streaming-video services. Its bulls argue that its dominance in streaming, strong renewal rates and the ability to raise prices that could reap rewards for investors.
Still, Netflix shares have dropped more than 40% since its all-time peak of 423.20 reached on June 21.
With Amazon, Disney (DIS), Apple, and others to compete against, Netflix is in for a major streaming battle. Also coming to market with streaming services are AT&T (T) and Apple. But it's Disney that poses the greatest threat in the minds of many analysts. Disney's streaming service is arriving in late 2019.
Another risk to Netflix is rising content costs and worsening negative free cash flow.
Netflix blew away estimates for new subscribers in the third quarter. It also guided higher than views for subscriber additions in the fourth quarter. But its guidance for free cash flow in 2019 was worse than analyst forecasts, likely due to higher programming expense.
Similar to Facebook, Google-owner Alphabet faces regulatory scrutiny for the role its YouTube unit played in the area of fake news. In its core market of search, Google still gets the lion's share of ad revenue.
But the stock fell after its latest earnings report missed revenue estimates, increasing concerns of rising competition with Amazon in digital advertising. Shares are off about 20% from their July 27 high of 1,291.44.
"We're seeing a larger-than-expected slowdown in Google properties' revenue, representing its core search business," eMarketer analyst Monica Peart said in a recent report. "This is likely related to the ramp-up in competition from Amazon, as consumers increasingly turn to the e-commerce giant for their product searches."
But the company still has some cards that have yet to play out and could lift the stock in 2019. One is cloud computing, where Google has a third-place market share behind Amazon and Microsoft (MSFT).
"We continue to view Google as fully capable to address the entire public cloud opportunity benefiting from broad strengths in security, reliability, and scalability," Baird analyst Colin Sebastian said in his note to clients.
Autonomous Cars
Another growth lever is Waymo, Google's developer of autonomous vehicle technology. Waymo has a convincing lead over the competition and the most experience with self-driving vehicles.
Waymo is exploring many different business models. In addition to selling the technology to customers, potential revenue drivers include transportation services, in-car services and new types of vehicles.
Jefferies analyst Brent Thill recently upped his long-term value estimate for Waymo to $250 billion, up from a previous range of $75 to $125 billion.
Google also has a leadership position in the field of artificial intelligence and machine learning.
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The post Mighty FAANG Stocks No Longer A Sure Bet For 2019 Stock Year appeared first on Investor's Business Daily.
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