Aswath Damodaran, the Dean of Valuation, regularly publishes fascinating analysis and insights. In February he valued the FANGAM stocks, just as the share prices began to crumple.
Since his post, the market has experienced a volatile 9 months. During the period the FANGAM share prices are down as follows:-
Facebook - Down 49%
Amazon - Down 39%
Netflix - Down 26%
Google - Down 27%
Apple - Down 11%
Microsoft - Down 19%
In this post I’ve attempted to tie in Professor Damodaran’s February article with today’s narrative. I used Damodaran’s assumptions for revenue growth and target margins, outlined in the table above .
Facebook (Meta) META 0.00%↑
Current Price - $108
Damodaran’s Valuation - $327.68
Updated Valuation -
Market Narrative - I reviewed Facebook’s woes in a recent post. The share price is down 70% from all time highs, wiping out 6 years of gains.
The narrative has shifted to one of despondence. The core family of apps are losing users, TikTok is stealing younger users and the CEO is burning billions to pursue a dream that will never materialise.
Amazon AMZN 0.00%↑
Current Price - $92
Damodaran’s Valuation - $2778.2 (before split) - now $138.91
Updated Valuation -
Market Narrative - Customers are purchasing less after the pandemic, AWS faces competition from Azure, whilst inflationary costs are putting pressure on margins and growth.
Apple AAPL 0.00%↑
Current Price - $141
Damodaran’s Valuation - $350.22 (assuming this was before the 4-1 2020 split). $87.55 currently.
Updated Valuation -
Market Narrative - Apple has been the least affected of the FANGAM stocks in 2022. The narrative maintains that the company continues to dominate. Apple controls supply the chain and will continue to grow with the recent iPhone 14 releases.
Netflix NFLX 0.00%↑
Current Price - $278
Damodaran’s Valuation - $445.53
Updated Valuation -
*Netflix’s depreciation costs significantly skew a DCF calculation. I have used a DCF calculator, but Damodaran approaches this differently, hence the disparity in valuation.
Market Narrative - Netflix was losing subscribers post pandemic, however there has been a turnaround in subscriber loss. Their main competitor, Disney+, is losing momentum, from which Netflix is benefitting.
Google GOOG 0.00%↑
Current Price - $96
Damodaran’s Valuation - $1406.96 (before split) - after $70.35
Updated Valuation -
Market Narrative - There’s a slow down in ad revenue generated from the Search segment of the business. Advertising remains core to Google’s business and increasing costs are reducing profits. Other Bets revenue is stagnating while the segment's losses are widening.
Microsoft MSFT 0.00%↑
Current Price - $241
Damodaran’s Valuation - $176.66
Updated Valuation -
Market Narrative - Cloud strength continues to drive growth. The More Personal Computing segment revenue has stagnated. The Activision acquisition doesn't look certain.
Conclusion
The FANGAMs have largely driven the US market for the last decade, right up until 2022’s pullback.
Damodaran’s assumptions differ from my own in numerous areas (he’s a professor of finance and I’m an amateur Substack writer, I’ll let you make up your own mind).
What is obvious is the FANGAM share prices now offer considerable margins of safety in comparison to February's update.
On average, they are down 29% in 2022, in comparison to the S&P’s 16%.
The decreases in Google, Facebook and Amazon could prove to be definitive buying opportunities. Apple has weathered the storm better than the rest, meaning that future returns might not be as forthcoming.
The market consensus appears to be shifting to energy and commodities. Meta is priced like a value stock, whilst Amazon’s price has reverted to 2018 levels. Tech companies are reacting to the changing environment, halting hiring and laying off tens of thousands of employees.
There’s no clear answer where to invest as we move into a high inflationary/ interest rate environment.
Reflecting on the high inflationary period of the 70’s, Buffet highlighted how inflation swindles the investor, particularly the owners of the "Bad" businesses.
It’s impossible to predict how the next decade will play out, however, the FANGAM companies are very far from “bad” businesses.
In a high inflationary environment, these businesses (predominantly) exhibit positive traits;
High margins
High cash generation
Sticky infrastructure
Long runways and optionality on the future
Low Debt/Equity ratios
It’s possible that market lows are not in and that the current inflationary environment will drive up interest rates. However, for investors with long term time horizons, this could be an opportunity to invest in some of the world’s best businesses at fair valuations.