Extreme volatility continued today, especially in tech stocks, with the Nasdaq beginning the day down 80 points and ending up 100. The more swings we see and the more extreme they get, the more we hear of the general stock market’s dependence on the FANG stocks and how tied the Nasdaq composite is on these momentum plays. These stacks are Facebook (FB, Financial), Amazon (AMZN, Financial), Netflix (NFLX, Financial), Alphabet (GOOG, Financial) and Apple (AAPL, Financial). Perhaps it’s time to take a broader look to see which ones are the most overvalued compared to the others over a longer time frame.
Let’s keep it simple. Too many indicators can make us second- and third-guess ourselves. I’ll compare capital growth to earnings growth over the last five years and see which ones are growing out of proportion with the others. For capital value, we will count from the open of 2013 to all-time highs.
First, Facebook. Looking back five years, Facebook has exploded higher both in earnings and market cap. The stock has rocketed 6.8 times since the beginning of 2013, but so have its earnings. Facebook earned just $1.5 billion in 2013 and earned $16 billion five years later at the end of 2017. That’s earnings growth of 10.66 times and capital growth of 6.8 times. One could argue that as Facebook’s market saturates, capital growth should level off faster, but so far the numbers do not look all that crazy, at least not compared to its FANG peers.
Next, Amazon. Since the beginning of 2013, shares of Amazon exploded 4.5 times, counting to all-time highs of $1,617.54. The earnings-based calculation here is a bit trickier because Amazon took a loss of $39 million in 2013, so let’s use top line here instead. Amazon took in $61 billion in revenue in 2013 and $178 billion in 2017 for top-line growth of 2.9 times. From this snapshot, it looks more overvalued than Facebook, capital growth doubling revenue growth over five years. Also, for a company that reached over three quarters of a trillion dollars at its peak, $3 billion looks like paltry earnings compared to its gargantuan market cap.
As for Netflix, shares jumped from $23.61 to a peak of $333.98, for a massive jump of 14 times in five years. However, earnings have jumped more than twice as fast at 33 times, up to $559 million from just $17 million in 2013. Maybe the stock is overvalued, but at least its earnings are rocketing up even faster than its rate of overvaluation, if indeed it is being overvalued.
Alphabet looks to be more overvalued than its FANG peers, at least by comparing earnings to capital growth since 2013. Alphabet, then Google, earned $12.92 billion in 2013, but earned only $12.66 billion in 2017. Granted, this snapshot is not exactly fair to Alphabet due to changes in tax accounting, so let’s use EBITDA instead. That would be $14.5 billion in 2013 to $27.19 billion in 2017, slightly less than double. While EBITDA doubled, market cap more than tripled. How much more can Alphabet really grow?
Finally, Apple. Capital growth of 2.8 times since 2013 and earnings growth from $41.7 billion to $48.35 billion, or 16% over the same five-year period. Just by that simple calculation, the world’s most valuable company by market cap also seems to be the most overvalued of the FANG stocks.
Disclosure: No positions.
