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How Coronavirus Changed The FAANG Playbook

FAANG

After a harrowing five weeks that saw equity markets plunge 30%, many U.S. sectors are now on the mend. 

The U.S. stock market’s favorite benchmark, the S&P 500, has racked up gains of 25% ever since it sank to a 3-year low of 2,237.40 on March 23rd, thus offering investors fresh hopes that the worst could be in the back mirror. 

JPMorgan clearly belongs in the bull camp, expressing optimism that investors could fully recover their losses sometime next year. Others, however, are less sanguine and have warned not to get too excited about the pullback saying a V-shaped recovery is unlikely. In other words, brace yourself for a long slog back to the top. That heads up is based on evidence that ultra-deep bear markets take, on average, 7.5 years to fully recover.

As you might expect, sectors that took the biggest hit such as retail are bouncing back more strongly than those that suffered shallower dives such as technology. The tech benchmark Technology Select Sector Fund (XLK) has rallied 9.6% over the past five trading days compared to a 22.6% gain by the S&P Retail ETF(XRT) over the timeframe. Still, XLK is only down 6.4% YTD vs. -26.5% return by XRT.

Unfortunately, the AdvisorShares New Tech and Media ETF (FNG)--created in 2017 as a play on the famous FANG stocks-- went bust in September. Consequently, FNG ceased operations, liquidated its assets, and distributed the proceeds to shareholders on October 11, 2019. 

Nevertheless, the tech sector’s famous quintuplet of Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet/Google (NASDAQ:GOOG) aka FAANG, remains alive and well.

FAANG stocks have been a monolith of performance in the past. However, they have decoupled considerably after the latest bear run with some like Netflix and Amazon outperforming while others like Apple and Facebook have become laggards of the group.

Here’s a peek at FAANG’s performance under the COVID-19 crisis.

Source: CNN Money

#1 Facebook Inc.

     YTD Return: -14.9%

Facebook has turned into the biggest underperformer of the FAANG group, falling by a margin even bigger than the market average.

FB’s woes have come mainly on concerns about lower ad revenues from retail, travel and recreation clients due the ongoing lockdown and weak economy in many parts of the globe. As Barron's recently warned in a brutal assessment of the industry, advertising is drying up everywhere you look thanks to the worst health crisis in modern history. Although the work-from-home phenomenon might mean higher traffic, it just won’t be enough to offset lower ad spending amid a massive downturn by the global economy. Consequently, FB has warned of a revenue slowdown at a time when  operating costs remain high.

 FB stock though has gained 10.5% over the past five days.

#2 Apple Inc.

     YTD Return: -9.0% Just as Apple was returning to investors’ good books by resuming growth after a worrying slump, COVID-19 has come and hit the iPhone maker where it hurts most--in its pivotal China market. 

In January, the company cut the revenue forecast for the final quarter of the financial year citing fewer iPhone upgrades and weak sales in China. The company has not issued another update yet Wall Streets can smell blood in the water and has dished out a couple of downgrades. Even Apple’s biggest perma-bull, Wedbush, has lowered its price target from a Street-high of $400 to $335, citing "dark days ahead" due to the coronavirus impact. 

Related: Output In World's Largest Copper Mine Is Falling

With the company recently closing all stores outside Greater China until further notice and even restricting online purchases of its smartphones, it’s easy to see why there’s so much pessimism surrounding the company at the moment. 

The beleaguered company though still has a few things going for it, including strong teen demand for the iPhone and Apple Watch as well as the launch of its first 5G smartphones later in the year.

 #3 Amazon Inc. 

    YTD Return: 10.2%

While FB and Apple continue counting their losses, Amazon is busy reinforcing its credentials as an all-weather and quintessential stay-at-home stock.

The reasoning is straightforward--the pandemic is acting as a headwind for the vast majority of retailers and businesses but as a tailwind for Amazon.

Amazon is likely to see a greater influx of online traffic as people struggle to find household supplies in their local stores. The retailer might also be the best option for consumers in the U.S. and elsewhere during the ongoing lockdown especially with same-day shipping available in most cities in the U.S. Meanwhile, the company’s subsidiary PillPack--an online pharmacy--is convenient for people who need their medication delivered at their homes.

The online retailer is doing its part to help battle the pandemic by partnering with the Gates Foundation to deliver test kits in the Seattle area.

#4  Netflix Inc.

    YTD Return: 14.6%

Another stay-at-home classic, NFLX has soared the most among FAANG stocks during the lockdown.

With most movie theaters throughout the country shut down amid the coronavirus pandemic, at-home entertainment has been benefitting. It comes as little surprise that the streaming video company has been doing booming business, so much so that the leading video streaming company has been forced to lower video quality in Europe to ease the load on broadband networks amid a surge in home Internet use during the COVID-19 crisis. The company says its standard definition videos use about 1 GB of data per hour compared to 3GB/hour for HD videos.

Wall Street is hugely bullish on Netflix, with some expecting it to also post huge user-growth numbers.

#5  Alphabet/Google Inc.

       YTD Return: -9.1%

Like Facebook, Google is facing the bugaboo of lower ad revenues as businesses everywhere feel the heat.

However, Google’s huge leadership in search ads might mean that it might record lower revenue declines than other ad platforms since these types of ads are one of the last areas in advertising likely to see budget cuts. BMO’s Daniel Salmon recently upgraded Alphabet from Market Perform to Outperform with a $1,400 target saying the company is  better positioned than Facebook due to its "higher exposure to larger enterprises vs. smaller businesses. Alphabet is also better diversified with a host of non-ad businesses commonly known as ‘Other Bets.

Nevertheless, Wall Street remains largely bearish on the company especially due to operating expenses such as traffic acquisition costs (TAC) which have continued rising faster than revenues for years now.

By Alex Kimani for SafeHaven.com

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