One FANG Losses A Bull With Canaccord Downgrade Of Google
The overall outlook for the large technology stocks known as FANG -Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet's Google (GOOG, GOOGL) - remains positive, according to Canaccord Genuity analyst Michael Graham. However, the analyst downgraded Google to Hold from Buy, citing his belief that gross margin estimates for the company are too high, while it will have difficulty maintaining the growth rates it has delivered over the last two years.
FANG FUNDAMENTALS SOLID BUT OUTPERFORMANCE MAY BE HARDER: All four of the key growth drivers for the FANG stocks - digital advertising, digital video, e-commerce, and cloud services - remain intact, wrote Michael Grapham in a note to investors today. Moreover, only 12 large cap tech stocks are expected to grow above 15% in 2018, and four of those are the FANG stocks, the analyst stated. "There are few growth alternatives" to FANG within tech, the analyst stated. However, he says that FANG's stock charts indicate that "a lot of good news is already priced into the shares," and he thinks that it will be harder for them to outperform going forward.
GOOGLE DOWNGRADE: Much of Google's growth over the past two years has been due to increased ad loads on mobile search and YouTube, and that phenomenon is unlikely to occur again, according to Graham. Additionally, the consensus estimates for Google's gross margins appear to be too high, "limiting the potential" for increases to earnings per share estimates for the company, the analyst stated. Finally, Google's valuation is expensive by historical standards, the analyst contends, with the shares nearing his $1,000 per share price target.
WHEN TO BUY: Facebook and Netflix are the top two FANG stocks for this year, as the social network should beat consensus estimates due to Instagram's contribution and Netflix's subscription totals should be good, Graham believes. For 2018, Netflix is his top pick, as he thinks that the company's subscriber totals will continue to be positive catalysts. For 2019 and beyond, Graham recommends Amazon, as he expects the company to launch two or three more major businesses in the next five to ten years.
RATINGS, TARGETS: Graham raised his price target on Amazon to $1,200 from $1,150 and kept a Buy rating on the shares. He increased his price target on Netflix to $175 from $165 and kept a Buy rating on the shares. The analyst kept a $175 price target on Facebook and maintained a $1,000 price target on Google.
PRICE ACTION: In morning trading, Facebook fell 2.3% to $147, Amazon slid 2.3% to $954, Netflix gave back 2.5% to $148, and Google dropped 2.6% to $942.50.
Disclosure: None.