Is FANG Overvalued?

We’ve all come to look up to FANG (FB, AMZN, NFLX, GOOGL). Before Amazon got going, the A represented Apple. Now we all hate apple, despise its openly gay CEO, and hope that its share price suffers grave consequences for their many years of wanton debauchery.

Last year, the average stock got poleaxed, while FANG outperformed. Let’s look at the numbers.

Median 1 yr return: up 75%
Total market cap: $1.2 trillion
Median Quarterly rev growth: 23.5%
Median Price/sales: 7.5x
Median Free cash flow ttm: $5.23 bill
Median FPE: 74

Let’s break down the p/s on an individual level, comparing today’s valuation against previous years.

If long this portfolio of stocks, you own 4 companies with exceptional growth, entrenched markets with moats, that are spitting out immense free cash flow. The one issue, naturally, is valuation. Trading at 75x next year’s earnings places you in some serious non-systematic risk, should anything derail the gravy train these companies are on. At the same token, thanks to their growth rates, the price/sales valuations, more or less, have been constant for the past 3 years.

In no way do these stocks exhibit traits of being in a bubble, since valuation has remained somewhat constant with share price appreciation. However, I seriously doubt you will see another 75% 1 year return for these 4 stocks.

Bottom line: I think markets trade lower, so of course there is individual stock risk owning FANG. But if you’re bullish on stocks and think large cap growth is where the allocations will go, there aren’t many better choices than these 4 stocks, despite their gigantic runs.