Facebook (FB, Financial), Amazon (AMZN, Financial), Netflix (NFLX, Financial) and Google, a subsidiary of Alphabet (GOOG, Financial)(GOOGL, Financial), also known as the FANG stocks, have a huge role to play in our future. The great thing about these four companies is that they are leaders in their own segments. While Facebook and Google hardly have competitors challenging them, Amazon and Netflix operate in an extremely difficult environment but still manage to keep their leads growing with each passing year.
Let us take a quick look at all four companies in terms of growth, competitive landscape and current valuation. The first part of this two-part series covers the first two FANGs – Facebook and Amazon. The second part covers Netflix and Alphabet’s Google.
The social media giant has been on a roll for many years, but its double-digit user base growth rate has continued unabated this year. Though most of that growth is coming from Asia Pacific and ROW (rest of the world), there is still plenty of room for user base growth in the Eastern part of the globe.
On the negative side Facebook spooked investors during the third quarter earnings call, saying that its advertising load may be closer to peak, meaning it is already showing enough advertisements to users, and it may limit the strong growth witnessed in average revenue per user (ARPU) in the last few users.
ARPU has been growing steadily for Facebook across all regions, and this is not something that can go on forever because the amount of time a user spends on Facebook is not going to keep increasing indefinitely.
Facebook’s top line is intact because of its strong user base growth, but that might see a slowdown in the next few years. Penetration in developed markets has already brought user base growth to sub-10% levels, and top-line revenues are heavily dependent on those markets.
But the clear advantage Facebook has is that there isn’t any serious competition for it in the global arena – at least, not on the social media front. Facebook does compete with Google for advertising revenues, but there’s hardly any competition at their altitude when it comes to the utility of its applications.
Moreover, the rapid growth of Instagram’s user base from 30 million in 2012 to now over 600 million should provide adequate top line support over the next few years, by which time Instagram will most likely join Facebook and WhatsApp in the billion-users-plus club.
Growth prospects are as good as it gets for the world's leading social media company and the market has responded in a big way, pushing the stock up by more than 12% in the last 12 months.
From an investor’s viewpoint, at 13 times sales, most of this future growth is already priced into the stock, and returns at the current price point will be extremely slow to come by.
Amazon
Amazon has been on a tear this year, firing on all cylinders. International markets are growing, operating margins in North America have been stable, and Amazon Web Services kept growing at above 50% levels. The great thing about Amazon’s growth is that the company is operating in an extremely competitive industry where margins are extremely small. There’s hardly any shoulder room, but Amazon has kept on taking customers from its physical rivals.
During the recently concluded holiday season, Amazon walked away with 36% of online sales. E-commerce is not a new phenomenon, and the transition to online sales channels has been going on for years. But other retailers, despite the time they had in their hands and the money they had in their pockets, haven’t been able to come anywhere near the scale that Amazon has reached. And this situation is much more pronounced in their shared home market of the U.S.
On the cloud computing side of things, AWS is proving to be a big, fat bonus package that bolsters the bottom line and allows the retail division to keep investing more into its own growth.
AWS quarterly earnings have already crossed $3 billion and are now just a few years away from hitting $20 billion annually at the current growth rate. Operating margins for this division have been consistently higher than 25% for the last several years, and if that holds, it will eventually translate to a cool $4 billion in operating income when that $20 billion annual revenue level is surpassed.
With the bottom line thus taken care of, Amazon can further step up its spending on Amazon Prime, adding more and more service layers to it, increasing its value to customers, attracting more users and ultimately growing its retail top line.
No other retailer has anything that can match the services provided by Amazon Prime, and that gap is only going to get wider as Amazon keeps adding to the benefits. As the Prime user base grows around the world, top-line growth must necessarily follow. With operations in more than 10 countries Amazon is the one and only truly international retailer.
Amazon had a good run this year with its stock price surging nearly 15% in the last 12 months. The stock is trading at 2.84 times sales and remains a great "buy now and hold forever" stock.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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