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As coronavirus halts US stocks#39; rally, can FAANG offer safe place to investors?

February 27
16:56 2020

After scaling new peaks just a week ago, the S&P 500’s historic rally came to a screeching halt on fears of novel coronavirus becoming a global pandemic.

The index, which is generally considered a proxy to the US economy, has been in a downtrend for the last five sessions, tanking 7.97 percent from its recent record high on February 19.

The so-called FAANG stocks, an acronym that refers to the stocks of five prominent American technology companies -Facebook, Amazon, Apple, Netflix, and Alphabet (earlier Google), have also borne the brunt.

The five stocks, which make up for about 15 percent of the S&P 500, have a market capitalisation of over $ 4.1 trillion as of January 2020.

These companies have had a stellar rally since the beginning of the year, essentially shrugging off the coronavirus outbreak. They finally succumbed to the selling pressure on February 24.

Even though most of the five constituent stocks recouped some losses on February 26, with Netflix leading the charge (up 5.32 percent), their high valuations have raised concerns over the existence of a bubble.

However, some have argued that the fundamental strengths of these stocks justify their current valuations.

Let us take a look at the five companies and how coronavirus can impact their underlying value:

Facebook

The tech giant does not have direct exposure to China other than its Oculus virtual reality devices. The primary top line driver for Facebook is its advertising revenue, which shall only increase as the outbreak widens, limiting people to their homes which, in turn, would increase their screen time.

However, being an advertising company, Facebook is dependent on overall economic growth. And with recessionary fears looming large, big corporates are expected to cut their advertising spends. With that said, Facebook caters to a varied audience, consisting of both small and big advertisers, some of whom have not been impacted by coronavirus just yet.

The stock has seen a 12 percent haircut from its all-time high of $ 224.2 witnessed on January 29, 2020. And at a PE of about 21, which is below the PE of S&P 500, the stock appears to be a bargain, if not a downright steal.

Amazon

The Jeff Bezos-owned company has plunged 9.4 percent after touching an all-time high of $ 2,185.10 on February 19.

The massive drop seems a little unjustified since the company has little exposure to China as it pulled out of the marketplace last year amid stiff competition from native companies including Alibaba and JD.com.

Also, its unique position in the marketplace, where a plethora of sellers deal in similar products, makes the cut in the supply chain from China almost redundant.

Amazon also had a good quarter. After failing to meet analysts’ earnings expectation for two quarters, the company posted a robust 21 percent YoY increase in net sales beating Wall Street estimates. Moreover, its global Prime membership jumped from 100 million to 150 million in just 19 months making it an overwhelming success. 

Experts suggest that if the coronavirus situation escalates, Amazon may be able to ride the tide while its competition will be stifled due to cut in the supply chain.

Apple

Among the FAANG stocks, Apple has the largest exposure to China. 

The scrip tanked 7.6 percent on February 24, extending the losses the next day before recouping some losses on February 26.

The technology giant is heavily dependent on China to meet production demands. With the coronavirus situation seemingly deescalating in the host nation, the worst might be behind for Apple.

The company has re-opened about 30 of its 42 stores in China and its supplier and mass assembly partners are also slowly picking up speed.

However, some analysts believe that the demand destruction may spill into the next few quarters, posing a near-term threat to the scrip.

Netflix

Netflix stock made a u-turn recovery on February 26, wiping off most of the losses of the previous two sessions. However, weakness still persists as it is still trading 10.7 percent below its YTD high of $ 327.85 witnessed on January 26.

According to market players, the sweeping effects of coronavirus may bode well for the company as people, limited to their homes, would seek solace in the entertainment provided by Netflix.

Moreover, the media service providers’ robust quarterly numbers paint a positive picture for the company going forward. 

Netflix reported revenue of $ 5.47 billion, up nearly 31 percent YoY. While the top line is bloated by price increases in 2019, it also reflects the growing subscriber base of the company.

Netflix added 8.76 million net new subscribers during Q4 with subscription numbers hitting record additions in Europe, Middle East, and Africa, Latin America, and Asia Pacific regions. 

Alphabet

Coronavirus fears dragged Google’s parent below $ 1 trillion market cap. The scrip wiped off more than 9 percent since hitting an all-time high of $ 1,530.74 on February 19.

With virtually no presence in China, the company may have fallen victim to the widescale sell-off in US equities.

The sell-off also aides fears of premium valuations that had kept risk-aversive investors on the sidelines.

The company has multiple moats including its browser Chrome which was recently revamped to increase cross-selling and boost Alphabet’s ad revenue. Moreover, Google Cloud’s performance has noticeably improved. The unit’s revenue jumped 53 percent YoY in 2019 and in Q4, its revenue reached an annual run rate of $ 10 billion. 

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