A Viral Market Update XIII: The Strong (FANGAM) Get Stronger!

Value and Pricing

I know that this has been a long lead in, but interesting though it might be to explain why the FANMAG stocks are where they are, the question of the moment in investing is whether you should buy, sell or just watch these stocks. Having valued all these stocks in the past, and acted on those valuations, with mixed results, I will draw on my past history with each company, to craft my stories and valuations of the companies.

Download valuations: Facebook, Amazon, Netflix, Google, Apple and Microsoft Simulation results: Facebook, Amazon, Netflix, Google, Apple and Microsoft

With each company, I report an estimated median (or most likely) value, as well as the range (1st decile, 1st Quartile, 3rd Quartile and ninth decile) of values that I estimated from running simulations. Given how much these stocks have gone up over the last six months, it should come as no surprise that I find only one (Facebook) to be under valued. Among the remaining, Apple looks the most overvalued (>30%), to me, followed by Amazon and Microsoft (10%-20%) and Netflix and Alphabet (<10%). I have also computed the internal rates of return for these stock, based upon the current market capitalization, and my estimates of expected cash flows. I would expect to earn an IRR of 7.16% on Facebook, Inc. (NASDAQ: FB), for instance, if I bought at its current market capitalization, and it generates the cash flows I expect it to. That may not sound like much to you, but in a world of low interest rates and equity risk premiums, it is high enough for the stock to be undervalued. Even Apple, the most overvalued stock in this group can be expected to generate a 5.30% IRR, at its current market capitalization, lower than what I would need it to make, given its risk, but not bad given the alternatives. That said, I expect you to disagree with me, perhaps even strongly, on my stories and assumptions, which is one reason the spreadsheets are yours to download and change to reflect your views.

In Closing

In the interests of full disclosure, at the time that I started on this post, I owned three of these six stocks, Apple Inc. (NASDAQ: AAPL), Facebook and Microsoft, with each having spent significant time in my portfolio; my posts detailing their acquisitions are here, here and here. As you look back at the valuations that I used to justify those investments, they seem laughably low, and I will not claim any semblance of clairvoyance. In fact, I bought Microsoft in 2013, even though I perceived it to be an aging company with little left in the tank in 2013, Apple in 2016, notwithstanding my expectations of low growth in the future, and Facebook in 2018, in the aftermath of the Cambridge Analytica scandal, because I found the companies cheap, even with my stilted narratives.