I recently added Tencent and Facebook. Most companies listed on the NASDAQ appear overvalued to me also. The moat is key! Investors are searching for the next FANG and are willing to attribute growth forecasts assuming the moat will remain impenetrable. Valuations will determine shareholder returns. I do think this time is different in that valuing these businesses with traditional metrics will lead us astray.
What will monetisation of Instagram (with 1 billion monthly active users) generate for Facebook?
For google, how successful will the foray into artificial intelligence be?
Will Amazon continue to destroy retail and then increase prices/margins?
Can Netflix cut costs, increase prices and maintain user base?
Will everyone still be buying new iphones in 10 years time?
Never before have companies been so truly global and dominant. And never before has it been so difficult to predict shareholder returns. Aswath Damodaran is an expert who provides impressive insight into valuing these businesses on youtube.
Facebook: Friendless, but still formidable!
Alphabet Soup: All Alpha (Google), No Bets?
Amazon: Glimpses of Shoeless Joe!
Netflix: The Future of Entertainment or House of Cards?
Just on that topic - of the FANGs (Facebook, Amazon, Netflix & Google), or FAANGs (with Apple added), or FAAAN stocks - if you use Google's actual company name, which is Alphabet...
I saw this in a recent TGG report (Templeton Global Growth LIC Investment Management Report, released as an ASX announcement for TGG on August 9th - 5 days ago):
That shows that almost half of the S&P500's 16.2% gain over the 12 months to July 31st was due to just 9 stocks, referred to here as the Nifty Nine. Without those nine companies, the S&P500 would have returned only 8.5%.
Another interesting thing is that the two companies that screen as the most expensive (on P/E or P/B ratios) are clearly Amazon (PE=106.2, PB=20.5) and Netflix (PE=125.3, PB=28.3), however those two have also provided the best returns to shareholders over the past 12 months, with their share prices rising +79.9% and +85.8% respectively.
It's been a hard year for value investors, and a pretty good year again for growth stocks. I'm still mostly in the value camp. Our time will come. Amazon is probably in a class of their own, and FB & Apple don't look overly stretched in relation to their continued growth trajectory. Even Alphabet (Google) looks reasonably priced for their future growth. Some of those others do look to me like they've gotten ahead of themselves, but I'm no expert in tech companies, so my opinion here is pretty meaningless. The risk, clearly, is that in a bear market, or just a decent correction (or a crash), companies that have a lot of future growth priced in already (very high PE companies) are going to be hit particularly hard. In that scenario, the S&P looks relatively vulnerable, particularly as their performance is so reliant on such a small number of companies, many of whom look quite expensive right now.
Most high quality ASX companies have stretched valuations and are not appealing to me at these prices. I think some of the tech giants overseas still look interesting (Facebook, Tencent, Apple, Google).
Bull points
Founder led company
Wide-moat
Dominant social media network with 2 billion users
Valuable user data - posts, profile information, pictures, friends lists, and groups
Has pricing power for targeted online advertising
Potential for user growth in Asia
Potential to monetize Instagram and WhatsApp
High cash position with no debt
Bear Points
Decreasing margins as company invests in new features, improves data protection and shifting focus away from news-feeds Privacy scandal could lead to government regulations and fines
Competition in social media space could reduce user intensity
Valuation
Growth is slowing from decreasing margins and revenue growth. Still expecting double digit EPS growth for the next few years. Current forward PE 26. 5-year average 36
Aurelia Metals (AMI) is rapidly becoming a top mineral explorer and developer, still very undervalued and just starting to get on the radar screen of big funds. Great chart too, just keeps trending higher. Latest 68.5c.
G8 Education (GEM) is a great short :) A childcare rollup in serious decline, with a good chance of plummeting on their next report due 27th August.
