FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs

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Wolf Richter,

This time, it’s different, say the strategists. So we’ll take a look.

In the bewildering wilderness of the most hyped Wall Street acronyms, we’re going to stick to FANGMAN – Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, and Nvidia – for the special moment. And the special moment is that the Nasdaq, or more loosely “tech stocks,” closed today at a new high.

But don’t worry. With regards to tech stocks, no matter how high they’ve soared, there is no bubble, based, believe it or not, on fundamentals, Goldman Sachs strategist Peter Oppenheimer and Guillaume Jaisson pleaded in a note, cited by Bloomberg. And the fun is going to continue, the said. And it’s different this time:

“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future.”

“Given that valuations in aggregate are not very stretched, we do not expect the dominant size and contribution of returns in stock markets to end any time soon.”

“Leading tech companies today have become very large in terms of market value, but that reflects the significant growth of technology spending and its ability to displace other more traditional capex spending.”

So tech will continue to dominate, they argue, as everyone will have to buy it, including retailers as they try to escape the brick-and-mortar meltdown by shifting to e-commerce. And then there’s the whole huge promise of AI. They add:

“This ‘snow balling’ effect is similar to what was experienced during the industrial revolution where one technology led to another and caused traditional industries to spend more on technology to survive.”

Yes, Y2K comes to mind.

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So let’s take a look at the non-bubble in the FANGMAN stocks. Here are their basic data as of Monday evening: Market capitalization, price-earnings ratio (P/E Ratio), annual revenue growth, annual revenues for the last full year reported, and price-to-sales ratio.

Market Cap,
Annual revenue growth 2017 Revenue,
Price-to-Sales Ratio
FB $562 32 47.1% $41 13.8
AMZN $797 210 30.8% $178 4.5
NFLX $156 243 32.8% $12 13.3
GOOG $783 48 23.7% $111 7.1
MSFT $774 56 5.5% $90 8.6
AAPL $935 19 6.7% $229 4.1
NVDA $156 44 40.6% $10 16.1
Combined: $4,163 $669.0

A few things stick out:

Combined market cap of these seven companies, at $4.16 trillion, is between the GDP of Germany ($3.47 trillion) and the GDP of Japan ($4.94 trillion). That enormous market cap gives them enormous financial power and resources that allow them to buy anything and possibly anyone for any price, and Goldman Sachs wants to get its slice of that pie.

We saw a demonstration of this principle today. Microsoft’s planned purchase of GitHub for $7.5 billion – $7.5 billion, and no one even raised an eyebrow about the amount! – shows that these companies share one thing in common: Money is no objective because of their inflated – I mean, fundamentally sound – market capitalization.

The P/E ratios range from 19 for Apple – reasonable for a “growth” company with 15% to 20% revenue growth, but Apple only squeezed out 6.7% – to 210 for Amazon and, gloriously, 243 for Netflix. But there’s truly no bubble here because triple-digit P/E ratios of huge and mature companies have become one of the new normals.

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Annual revenue growth looks good except for Apple and Microsoft, which sport revenue growth in the miserable single digits, despite continued acquisitions of other companies for billions of dollars.

The formerly crucial price-to-sales ratio – investors were looking for something between 1 and 2 – completely blew through the roof, with three companies sporting double-digit price-to-sales ratios. No one even bothers to mention the ratio anymore because that would be just ludicrous because, in order for the price-to-sales ratio of Netflix to drop to, say, 3, its market cap would have to shrink by 77%, or by $120 billion.

So it’s better to not even mention these things anymore and instead talk about the promise of AI and how these platforms are going to take over the world as we know it, and how their share prices and market cap are going to double over the next year because that’s what FANGMAN stocks do, don’t you get it?

Of the seven companies, junk-rated Netflix is a tried-and-true mechanically effective cash-burn machine. But no problem. Given the company’s market capitalization, the junk-bond market, which is in peak-bubble mode, is eager to feed it huge amounts of cash. Read…  Junk-rated Netflix Borrows $1.9 Billion, Most Ever, in “Drive-By” Bond Issue, to Burn $3-$4 Billion in 2018, Debt Soars to $8.4 billion 


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