The S&P 500 stock price index includes 500 companies. On Friday, five of the six so-called FAANGM stocks (all but Netflix) occupied the top spots as the largest S&P 500 companies by market capitalization. They were: Apple ($1,578 billion), Microsoft ($1,564 billion), Amazon ($1,442 billion), Alphabet ($1,002 billion), and Facebook ($665 billion). Netflix ($210 billion) was the 20th largest company in the S&P 500. Collectively, their record-high $6.5 trillion market cap accounted for a record 25% of the S&P 500’s market cap on July 3 (Fig. 1 and Fig. 2). That’s up from around 8% during 2013.
The Magnificent Six are widely referred to by their awkward “FAANGM” acronym. “MAGFAN” would be easier to pronounce. In any event, count us among the fans of these mega-cap companies, though they aren’t cheap since they have so many fans. Consider the following:
(1) Viral stocks. All six of the FAANGMs are among the biggest beneficiaries of the economic upheaval caused by the Great Virus Crisis (GVC) and are likely to continue to benefit from its aftershocks well after the crisis is over. That’s because their businesses are Internet-based, so the more that people’s work, education, and entertainment are home-based, the more these businesses thrive.
(2) One for all and all for one? While all six are widely perceived to be technology stocks, only Apple and Microsoft are actually constituents of the S&P 500 Information Technology sector, accounting for 44.4% of the sector’s market cap (Fig. 3). Classified as members of the S&P 500 Communication Services sector are Alphabet, Facebook, and Netflix, accounting for 66.4% of the sector’s market cap (Fig. 4). Amazon is actually a member of the S&P 500 Consumer Discretionary sector, and accounts for an eye-popping 50.8% of the sector’s market cap (Fig. 5).
(3) All Growth, no Value. All six are included in the S&P 500 Growth index, accounting for a whopping 40.7% of its market cap during the June 25 week (Fig. 6). Given the rapid growth in their earnings and their relatively high valuation multiples, there’s no mistaking the FAANGMs for stocks that should be in the S&P 500 Value index.
(4) Galloping revenues and earnings growth. Since the start of 2015 through the July 3 week of this year, the forward revenues of the FAANGMs is up 115.1%, well ahead of the 2.6% increase for the rest of the S&P 500 (Fig. 7). Over the same period, their forward earnings is up 95.0%, significantly outpacing the 1.9% drop for the rest of the market (Fig. 8). Much of that outperformance occurred this year. Nevertheless, even before the GVC struck, the FAANGM forward revenues rose 101.1% from the start of 2015 through the end of 2019, while the remaining 494 stocks in the S&P 500 registered a 10.9% gain in forward revenues. Over the same period, the FAANGMs’ forward earnings rose 88.1% while those of the other 494 S&P 500 stocks rose 25.3%.
Collectively, the profitability of the FAANGMs is boosted not only by their revenue growth but also by their relatively high profit margins. Their forward profit margin was 15.5% during the July 3 week, well above the 10.3% for the rest of the S&P 500 (Fig. 9). If we exclude low-margin Amazon from the FAANGMs, their collective forward profit margin rises from 15.5% to 21.7%.
(5) Leading from in front. The FAANGMs have led the bull market for quite a while. Since the end of 2012 through the July 3 week, their market cap is up an astonishing 467%, while the rest of the S&P 500 is up just 70.5% (Fig. 10). Since the March 23 bottom, the FAANGMs are up 51%, while the rest of the index is up 35%.
(6) Not cheap. Everyone knows all the above, which is why the stocks are so expensive. The forward P/E of the FAANGMs soared from a recent low of 26.1 during the March 20 week to 40.1 during the July 3 week (Fig. 11). The forward P/E of the S&P with and without the FAANGMs is 21.5 and 18.8 (Fig. 12). Here are the current forward P/Es of each of the Magnificent Six: Alphabet (29.9), Amazon (97.7), Apple (25.2), Facebook (26.9), Microsoft (33.2), and Netflix (62.1) (Fig. 13).
(7) Buying back shares. Collectively, the FAANGMs’ number of basic shares outstanding fell 12.7% from Q1-2013 through Q1-2020 (Fig. 14). That’s a decline of 1.8% per year on average. An amount of share-count decline that small is not a big contributor to their earnings-per-share (EPS) growth rate, which suggests that much of their stock buybacks have been motivated by reducing EPS dilution from shares awarded to employees through compensation plans.
(8) Seven would be even more magnificent. There are other magnificent stocks that we could add to the FAANGMs. Nvidia comes to mind. That would make it the Magnificent Seven, or “FAANNGM.” If Tesla were to join the S&P 500, the Magnificent Eight could be “FAANNGMT.”
The Magnificent Six are widely referred to by their awkward “FAANGM” acronym. “MAGFAN” would be easier to pronounce. In any event, count us among the fans of these mega-cap companies, though they aren’t cheap since they have so many fans. Consider the following:
(1) Viral stocks. All six of the FAANGMs are among the biggest beneficiaries of the economic upheaval caused by the Great Virus Crisis (GVC) and are likely to continue to benefit from its aftershocks well after the crisis is over. That’s because their businesses are Internet-based, so the more that people’s work, education, and entertainment are home-based, the more these businesses thrive.
(2) One for all and all for one? While all six are widely perceived to be technology stocks, only Apple and Microsoft are actually constituents of the S&P 500 Information Technology sector, accounting for 44.4% of the sector’s market cap (Fig. 3). Classified as members of the S&P 500 Communication Services sector are Alphabet, Facebook, and Netflix, accounting for 66.4% of the sector’s market cap (Fig. 4). Amazon is actually a member of the S&P 500 Consumer Discretionary sector, and accounts for an eye-popping 50.8% of the sector’s market cap (Fig. 5).
(3) All Growth, no Value. All six are included in the S&P 500 Growth index, accounting for a whopping 40.7% of its market cap during the June 25 week (Fig. 6). Given the rapid growth in their earnings and their relatively high valuation multiples, there’s no mistaking the FAANGMs for stocks that should be in the S&P 500 Value index.
(4) Galloping revenues and earnings growth. Since the start of 2015 through the July 3 week of this year, the forward revenues of the FAANGMs is up 115.1%, well ahead of the 2.6% increase for the rest of the S&P 500 (Fig. 7). Over the same period, their forward earnings is up 95.0%, significantly outpacing the 1.9% drop for the rest of the market (Fig. 8). Much of that outperformance occurred this year. Nevertheless, even before the GVC struck, the FAANGM forward revenues rose 101.1% from the start of 2015 through the end of 2019, while the remaining 494 stocks in the S&P 500 registered a 10.9% gain in forward revenues. Over the same period, the FAANGMs’ forward earnings rose 88.1% while those of the other 494 S&P 500 stocks rose 25.3%.
Collectively, the profitability of the FAANGMs is boosted not only by their revenue growth but also by their relatively high profit margins. Their forward profit margin was 15.5% during the July 3 week, well above the 10.3% for the rest of the S&P 500 (Fig. 9). If we exclude low-margin Amazon from the FAANGMs, their collective forward profit margin rises from 15.5% to 21.7%.
(5) Leading from in front. The FAANGMs have led the bull market for quite a while. Since the end of 2012 through the July 3 week, their market cap is up an astonishing 467%, while the rest of the S&P 500 is up just 70.5% (Fig. 10). Since the March 23 bottom, the FAANGMs are up 51%, while the rest of the index is up 35%.
(6) Not cheap. Everyone knows all the above, which is why the stocks are so expensive. The forward P/E of the FAANGMs soared from a recent low of 26.1 during the March 20 week to 40.1 during the July 3 week (Fig. 11). The forward P/E of the S&P with and without the FAANGMs is 21.5 and 18.8 (Fig. 12). Here are the current forward P/Es of each of the Magnificent Six: Alphabet (29.9), Amazon (97.7), Apple (25.2), Facebook (26.9), Microsoft (33.2), and Netflix (62.1) (Fig. 13).
(7) Buying back shares. Collectively, the FAANGMs’ number of basic shares outstanding fell 12.7% from Q1-2013 through Q1-2020 (Fig. 14). That’s a decline of 1.8% per year on average. An amount of share-count decline that small is not a big contributor to their earnings-per-share (EPS) growth rate, which suggests that much of their stock buybacks have been motivated by reducing EPS dilution from shares awarded to employees through compensation plans.
(8) Seven would be even more magnificent. There are other magnificent stocks that we could add to the FAANGMs. Nvidia comes to mind. That would make it the Magnificent Seven, or “FAANNGM.” If Tesla were to join the S&P 500, the Magnificent Eight could be “FAANNGMT.”
No comments:
Post a Comment