There is not one market commentator who will tell you that the FAANG stocks are fairly priced. All of them will tell you that Facebook, Amazon, Apple, Netflix, Google and other tech stocks are expensive. So as a potential investor you do not want to buy them and if you are a holder, you want to sell them. These five stocks are not the only ones that are “expensive” according to the market commentators and you can add companies like Tesla, Uber, Alibaba, Baidu, Beyond Meat, Tencent and many more names to this list.
So why do these shares get such a bad rap? The answer lies in the fact that there are very clever share analysts who sit in dark offices in New York, London and other major financial hubs across the world who crunch these numbers. They look at the financials of these companies and compare the current price to historic earnings and other indicators. They then extrapolate these historic results into the future and make a call on the share price. It must be said that they are not always wrong, but sometimes they are spectacularly so!
The problem occurs when these analysts do not understand the potential of these companies. There is a massive difference between a share analyst who understands financial and mathematical modeling, and a super-bright CEO of a company with potential. If you give a company like Amazon to a genius CEO, the chances of the valuations of the company by the analyst being too low is very likely.
We can just look at some local examples to illustrate this point. If you happened to be a shareholder in Naspers in, let’s say 2005, you paid R950 for the share. At that stage the PE of the company rarely dropped below 30, which made it an expensive share and every analyst advised you to sell it. Now it sits at R3500 after spinning off Multichoice and Prosus, unlocking fantastic value for shareholders, and it is still on a 36 PE. Another example is Capitec.
The reason for this disconnect between what analysts predict and what actually happens, is the ability of the company to re-invent itself. Amazon started as an online retail business but is now the biggest provider of cloud storage infrastructure services in the world. The same happened to Naspers. It started as a printing business but now it is a gigantic multinational consumer internet company. The magic lies in the paradigm-shifting nature of the technology sector. Our world is changing at breakneck speed and these companies can re-invent themselves fast enough to kick sand in the face of the analysts who do their modeling on historic figures.
You can take any of these companies and look at the services they offer. They have billions of customers using their products and many of these services are free. As and when they start to monetize these services, a new revenue stream will open up and they will start rolling out yet another indispensable offering. If the regulators decide to break up these companies because they are too powerful, you will see that as a shareholder, you will then just own more super profitable smaller companies and life will go on.