FAANG Stocks Have Evolved -- And Now They're Inexpensive

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FAANG (Facebook (FB) - Get Facebook, Inc. Class A Report , Apple (AAPL) - Get Apple Inc. (AAPL) Report , Amazon (AMZN) - Get Amazon.com, Inc. Report , Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report Google (GOOGL) - Get Alphabet Inc. Class A Report ) stocks are historically known for their explosive growth trajectories and high earnings multiples.

That's no longer the case, although arguably, it should be.

"We've thought of these massive multiples if you're talking 50, 60, 70 times, sometimes even even more than that in terms of a {forward} price to earnings multiple," said Shawn Cruz, trading strategy manager at TD Ameritrade. "The FAANG's, are getting more of an interesting valuation point."

Facebook is up 35% year-to-date, but it hasn't been multiple expansion that has done the trick, with Facebook's historically low current multiple of 19. Apple's forward multiple is just under 17. Amazon has seen its forward multiple approach 100 in recent years, but is currently at 54. Netflix has seen its forward multiple go above 100, but it currently sits at 51. Google's multiple is at 21.

Cruz mentioned rising competition for Netflix and Amazon specifically. Netflix is up against thick competition. Disney (DIS) - Get Walt Disney Company Report is bundling a streaming package with Hulu and Disney Plus. Apple is launching Apple TV Plus, but only investing $6 billion for now.

"I think they're not really quite the disruptors that they used to be. And that's why you're seeing the valuations come down a little bit," Cruz said.

But could theses valuations provide an attractive entry point, considering what's on the agenda for these names? 

Netflix's new growth market in the EU and Asia is looking strong. Even though it missed subscriber estimates in its latest quarter, RBC Capital Markets analyst Mark Mahaney wrote in a note out last week, Netflix is seeing positive subscriber addition trends in the EU, especially the United Kingdom, which sported an 80% satisfaction rate, which points to lower subscriber churn. All in all for Netflix, rising competition isn't a good thing, and it has pressured expectations. 

For Amazon, Walmart (WMT) - Get Walmart Inc. Report and other retailers are beginning to pose a threat on the e-commerce front. Walmart is investing heavily in making its one-day delivery service efficient and reliable. As big-box stores like Walmart and Target (TGT) - Get Target Corporation Report , retail department stores, brands like Lululemon (LULU) - Get Lululemon Athletica Inc (LULU) Report and others up their positions in the e-commerce market, which is still growing fast, Amazon's e-commerce growth becomes more threatened, which isn't helping the stock.

Still, Amazon has built a market-leading cloud business, taking more market share than even Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report . That  higher operating margin business is expected to account for the majority of Amazon's operating profit in the next few years, providing one area of considerable optimism for investors. 

Facebook shares were pressured at the end of 2018 by data and privacy concerns, worries that worsened when Congress stepped in to learn more about the company's practices this summer. But the stock has run up in 2019. The  still-burgeoning Instagram is not only adding users at a rapid clip, but dvertising pricing is expected to move up as well, as Chief Operating Officer Sheryl Sandberg has emphasized Facebook wants to make Instagram ads akin to an e-commerce model, upping return on ad spend for the advertiser. Plus, Facebook is adding channels for advertising to populate helping to increase the platform's ad load. 

Google still dominates in search, and isn't expected to give up its throne, but needs to find a new growth driver. 

Apple's hardware business is no longer about growth, but rather the restoration of its user base of slightly under 1 billion people worldwide. If Apple can maintain some edge with iPhones, it can continue to funnel users into its suite of services, which include Apple TV Plus, Apple News Plus, and the credit card with Goldman Sachs. All of those services attempt to offer plus content for an attractive subscription price. 

Many analysts value Apple's services business --separately from the slower growing hardware segment -- using a price-to-earnings multiple of well above 20, as it has high growth prospects and higher operating margins than those of hardware. The blended multiple for Apple -- at just under 17 in the market -- could expand to 20 should analysts be correct in their assumptions. 

Apple, Facebook, Amazon, Netflix, Google, Disney and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL? Learn more now.

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