Is the FAANGs story long in the tooth? Not if investors know their history

We continue to favour FAANG stocks, with the companies improving their earnings growth in 2018 and continuing to offer upside potential, Kames Capital’s Neil Goddin has said.
Goddin, head of equity quantitative analysis at Kames and manager of the Kames Global Equity fund, said while the stocks had seen share prices surge ever higher this year, (with some now closing in on the fabled $1trn valuation) history suggests they have further to go.
Kames runs a screening process that ranks stocks based on their prospects for performance. Goddin said Facebook, Apple, Amazon, Netflix and Google had all improved their ranking year-to-date.
“The strong fundamentals have shone through, and so far in 2018 the FAANGS have actually improved their screen ranking, driven by strong earnings growth,” he says.
“Therefore I will remain positive on FAANGS unless growth shows signs of slowdown and they start to move down our screen.”
Goddin acknowledges events like Cambridge Analytica have served to highlight concerns around the power of large cap tech, with investors right to revisit their investment cases after a multi-year period of outperformance.
But while the stocks’ valuations now seem astronomical to many – Apple’s current market cap is $950bn, with Amazon not far behind on $823bn[1] and Alphabet (Google’s parent) on $795bn – Goddin says compared to the giants of previous eras, they do not look overvalued.
“We compare the scale of the current crop of mega cap tech companies to the ghosts and zombies of corporate past and our cognitive bias is that these companies are getting too big for their boots,” he says.
“However, we measure market cap in nominal dollars. If you compare companies in dollar terms adjusted for today’s world, the story changes.”
The below table adjusts companies market cap for inflation and changes to the value of the US dollar.
Former giants and their market cap today:

• IBM $233bn in 1999 equivalent to $349bn today.
• Cisco $500bn in 1999 equivalent to $725bn today.
• General Electric peaked at $572bn in 1999 equivalent to $800bn adjusted for inflation.
• The Dutch East India Company raised 78m Dutch guilders in early 1600s. Today that would be valued at around $7.4trn.

Goddin adds the relatively asset-light nature of the FAANG models means that less capital is required for each dollar of growth, and less layers of management are needed, adding to their collective long-term potential.
“My view for the portfolio is that the formula is a reliable and consistent fly wheel of growth; it will be much longer before size will be a ballast,” he says.
“The capital that these platforms have spent to grow their business is also now a barrier to entry for newcomers, while they also provide the businesses with a platform to have reach into the next areas of growth, be that machine learning, voice assistance, autonomous driving or other edge computing applications (IoT). Therefore, the long and short of it is there is still lots to like about the FAANGS; both quantitatively and fundamentally.”

1. According to Google Finance, at its closing share price on 05/06/18 of $193.31 per share it had a market cap of $950.15b.

[1] According to Google Finance, at its closing share price on 05/06/18 of $193.31 per share it had a market cap of $950.15b.