Stock Markets Alerts Sunday Edition

It has been hard to avoid reading and hearing about Samsung lately.

News broke early this past week that the Korean conglomerate had killed off its new Galaxy Note 7 phone and was asking consumers to immediately turn off and return the phones they had purchased.

Samsung had already recalled the phones last month after several customers reported exploding batteries in the original models, asking customers to turn in their phones for a new and improved Note 7. Then there were reports that the replacement phones’ batteries were exploding too.

Samsung Galaxy Note 7Upon this news, all the major cell phone carriers halted sales of the phones and Samsung stopped all production.

Things only got worse from there. As reports started coming out that the replacement phones were exploding, Samsung’s stock tanked. On Tuesday in Seoul, shares fell 8% wiping out $17 billion in market value before the company announced terminating the phones, after which the stock dropped even further.

Samsung, as you’d guess, is now in crisis mode. They’re scrambling to identify the cause of the exploding batteries and to explain how they could have missed the critical flaw causing the battery fires twice.

With the reports of the batteries exploding in the original phones, Samsung placed blame on the battery supplier. They then switched to an alternative supplier for the replacement phones, but as we now know, that didn’t end the problems.

In the wake of all of this, the company has cut its operating profit by $2.3 billion, which erases all of the mobile business profit analysts had been projecting. And it has been estimated that the termination of the high-end phone will cost the company about $5 billion in operating profit through 2017.

Thankfully for Samsung’s reputation, no one was killed or seriously injured by these exploding phones, and the company acted quickly to remove them from the market. And while the recall is one of the biggest in the technology industry, it is far from the worst in history (for the worst, I’d point to either Merck & Co.’s 2004 scandal with its drug Vioxx, which increased the chance of heart attacks and strokes in some patients, or Takata’s recent catastrophe with its faulty air bags).

But Samsung’s trouble has me wondering, who stands to gain the most from this crisis? Apple or Google?

The original expectations were that Samsung would sell 10 to 14 million of the Note 7s by the end of the year, but that number has now dropped to zero.

The big danger for the company is in how fast they can come to market with the Note 8. If they take too long, it will create a vacuum for competitors to creep in. But they can’t move fast enough to save themselves this year.

The termination of the Galaxy Note 7—which was released on August 19—means that Samsung has no high-end phone in the game heading into the critical holiday season when most consumers upgrade their phones.

Initially, it seemed that the Note 7 was capitalizing on a lackluster new iPhone release, but with the phone now dead, Apple has very little competition in the high-end cell phone market.

Samsung and Apple had essentially split the market for $700-plus smartphones, which makes Apple a natural beneficiary of Samsung’s disaster.

In the near term, customers will need replacement phones immediately now that they have been instructed to return their Note 7s, and right now their only comparable option is an iPhone.

However, Google recently announced its new Pixel phone. The sleek new Pixel will be available October 20, and is Google’s flagship smartphone. What will be appealing to consumers of the Note 7 is that the Pixel is also an Android, like the Note 7. However the Pixel is tethered to Verizon, so buyers on other networks are limited to the iPhone in the high-end category.

It remains to be seen whether or not consumers will make a shift to the iOS operating system, or stick with Android, but still, both Apple and Google will see a boost from Samsung’s debacle.

But from a valuation perspective, Apple is the better bet between the two.

At the beginning of the year, there was a lot of worry surrounding Apple largely focused on stagnating iPhone sales and its ability to grow in the smartphone category.

But in the latter half of the year, there has been a rerating of the stock based on signs that growth isn’t declining after all.

While there aren’t many first-time buyers in developed markets and most revenue for the iPhone comes from upgrades, Apple is actively expanding its distribution channels in China which is improving growth, and they are also experiencing growth in other emerging markets like India and Indonesia.

Additionally, wireless operators have said that sales are strong for the iPhone 7—and especially for the 7 Plus—which has resulted in more optimism that the company can still grow. Likely not the 30% growth seen a couple of years ago, but at Apple’s current valuation, any growth is attractive.

Apple’s valuation was low at the beginning of the year, and still is low at 13.64 compared to Google’s 31.16 P/E ratio. A P/E ratio, or Price to Earnings ratio, according to Investopedia is “the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.”

Apple’s P/E ratio indicates that it is undervalued, giving investors a good buying opportunity. Apart from that, Apple offers a dividend of nearly 2%, which certainly doesn't hurt.

When news broke that Samsung was terminating the Note 7, shares of Apple jumped 1.7 percent to just over $116 per share. As numbers showing the company’s growth are released over the coming weeks and at year end, I believe the growth will be reflected in the share price making now a great time to take a position.

We’ll get data points in the coming weeks that will tell us definitively if Samsung’s Note 7 customers are jumping ship over to the iPhone 7—and by all accounts, it’s a probability that many of the 2.5 million Note 7 customers will do so—or if they’ll stay with the Android operating system opting for Google’s Pixel.

This is the first generation of the Pixel, which may scare away some potential buyers, and if consumers are worried about safety, Apple will benefit.

All of this positive news for Apple has given the company more time for R&D to develop new products that will all but surely help the company maintain its position as one of the most stable and profitable companies in the world.

As for Samsung, does the plunge from its Note 7 disaster create a buying opportunity? While the stock isn’t traded on a major U.S. exchange, it does make me think about how such negative situations can make for great buying opportunities. We’ll look at similar situations that other companies have faced—the previously mentioned Merck is one such example—and how their share prices responded in next week’s article.


source: Kristina Keene, Investiv

“Solar and batteries go together like peanut butter and jelly.” So said Tesla CEO Elon Must in a conference call in August.

For Musk, the very existence of Tesla is to help the world transition away from our reliance on greenhouse gas-emitting hydrocarbons. To do this, his master plan—first published in 2006 and updated earlier this year—boils down to this:

1. Build a low-volume car (the Tesla Roadster) that would be necessarily expensive.
2. Use that money to develop a medium volume car (the Model S) at a lower price.
3. Use that money to build an affordable, high volume car (the Model 3), and
4. To provide solar power because electric vehicles still need to be plugged in to
charge, and two thirds of our energy is still generated from coal and natural gas.

The point of all of this, in Musk’s words, is to accelerate “the advent of sustainable energy, so that we can imagine far into the future.”

This is the justification for his Tesla and SolarCity merger. For Musk, this merger is in-line with his long-term strategy, but does this acquisition really make sense for the underlying businesses?

It seems as though the deal is weighted largely on long-term vision, and while it’s a noble vision, it’s light on the near-term benefit for shareholders.

The two companies both need to raise capital, they collectively burned through nearly $5 billion in cash last year, and it seems that cash-burning SolarCity will drain Tesla’s juice when it needs all it can get to achieve its aggressive Model 3 roll-out plan.

All this considered, some think there is an upside to the deal which we’ll discuss further on. But first, let’s take a deeper look at both companies and the deal itself.


Tesla Motors has defined itself as the electric car company in the automotive industry. In addition to building and selling all-electric vehicles, the company also offers electric vehicle powertrain components and its Powerwall solar energy storage system.

Since it’s IPO in 2010, it’s stock price has increased from its initial offering of $17 to $201 by close on October 6, 2016. That’s a 1,082.35% increase since its IPO.

The company released its first vehicle, the Roadster—the world’s first ever all-electric sports car—in 2008 with limited quantities and a high price tag. In 2012, it delivered the Model S, a luxury sedan, with greater availability and priced to compete with comparable BMW, Mercedes, and Audi models. Both models were released with impressive product launches helmed by Musk, media buzz, and money in the door.

Finally, earlier this year, Tesla announced the Model 3, a mass-market vehicle priced in the sweet-spot at $35,000. The release of the the car set the industry abuzz when over 300,000 buyers lined up to reserve their Model 3s with a $1,000 deposit each. With the Model 3, Tesla earned over $300 million from reservations alone, and, with a price tag of $35,000, has a future expected revenue of $18 billion when the Model 3 begins shipping in 2017.

Considering that Tesla earned $4 billion in car sales last year, the magnitude of the revenue from the Model 3 is a game-changer.

But that $18 billion in added revenue doesn’t come cheap, and the company isn’t projected to become profitable until into the 2020s.

Beyond the media attention and new money that comes with each flashy new product launch, the company is in a highly capital-intensive industry. This requires the company to continually invest billions into scaling and staying a step-ahead of the competition, and Tesla has said it needs to raise more cash by the end of the year.

Because Tesla designs their cars from the ground up, their cost of goods immediately eats up 80% of revenue, and R&D costs add another 16%. These two expenses alone take up the majority of the company’s top line.

Couple that with the current construction of the expensive $5 billion Gigafactory. Once it’s done it will be capable of producing more than half a million batteries per year, making it possible for the company to reach its target of producing 500,000 vehicles annually by 2018.

The catch here is that delivery of the Model 3, the vehicle that will propel Tesla into profitability, is dependent on the completion of the Gigafactory.

Tesla is notorious for missing delivery targets, and I, for one, question the company’s ability to transition smoothly to a higher-volume production schedule especially considering that the mass-market Model 3’s delivery is contingent on an assembly line that isn’t even built yet.

But with all of this, there was a glimmer of hope this past week. On Monday, Tesla announced that it sold more cars than expected this quarter. This quarter was really the last chance the company had to unlock the door to raising much needed cash by the end of the year.

What’s particularly impressive about this is that year-over-year growth is 111%, and it proves that Tesla can actually hit or exceed a sales target even after misses in the two prior quarters.

My conclusion about Tesla is that it’s propped up by the hope of future profits, an altruistic mission, and an almost cult-like belief in its charismatic CEO, Elon Musk. The company can succeed, the potential is there, but it needs to successfully raise cash this year if it’s going to win big with the Model 3.

Let’s take a look now at SolarCity.


SolarCity has potential too, but its problems are greater.

The energy market in the U.S. is massive. While solar only comprises 1% of the overall energy supply, it is steadily gaining traction, and SolarCity is the leading solar panel seller.

To take advantage of the growing solar trend, SolarCity has scaled very quickly over the past decade, doubling capacity every year and compiling huge amounts of debt.

The company is run by two of Elon Musk’s cousins, and Musk is the Chairman of its board of directors.

The majority of its business is operating leases. The company pays the up-front costs of and owns its solar systems, then sells the power produced to its customers for the length of their contracts.

SolarCity’s sales costs are significant and ultimately account for more than 20% of the all-in costs per new installation. And, the company relies heavily on third-party financing to pay for its systems.

The company’s stock has lost more than half of its value this year, dropping from around $50 per share at the start of the year, to $19.51 at the close on October 6.

The big concern with SolarCity is that it burns through cash and had roughly $3.35 billion in debt at the end of June of this year.

In August, the company tried to raise $124 million from investors, offering an unusually high 6.5% interest rate on an 18-month debt offering. Musk and his cousins, SolarCity’s executives, bought $100 million of the debt.

SolarCity was able to raise $305 million in mid-September by selling future cash flows from some of its solar projects to a hedge fund advised by George Soros, but the reality is that it will constantly need to raise more money from investors to fund its business model of leasing solar energy systems to customers with no upfront costs.

Investors wanted SolarCity’s high costs to come down, but that has yet to happen so Tesla has stepped in. The company has no other buyers, and its short-term financing needs add urgency to the closing of the acquisition.


When it comes down to it, Musk is taking two bad businesses in terms of cash, and joining them together.

The $2.6 billion all-stock offer is expected to close in the fourth quarter. If the deal goes through, SolarCity shareholders will be offered 0.11 shares of Tesla for every share they own.

Musk has said that by merging the two companies, he hopes to “be able to expand [each company’s] addressable market further than either company could do separately,” and suggests that because the two have “shared ideals,” each would be able to increase the sales of the other. “Those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well,” said Musk.

It’s generally expected that Tesla shareholders will back the merger in a vote later this month as they believe in Musk’s long-term vision that combines electric vehicles with the battery storage and solar panels to keep them charged.

But approval by Tesla shareholders isn’t a sure thing. Several shareholders and analysts have raised concerns about SolarCity’s cash-burn and need for major financing during a time when Tesla is in the midst of its own expensive projects.

Not only that, but Tesla is facing four shareholder lawsuits over the deal alleging that Tesla executives and board members breached their fiduciary duty by entering into the merger process as Elon Musk and others hold shares in both companies. While shareholder litigation isn’t uncommon in deals like this, it does show dissension among voting shareholders and does have potential to delay the deal.

On the other side, considering the spread between Tesla’s offer and SolarCity’s current stock price, SolarCity’s shareholders are expected to approve the merger.

So What’s The Problem?

The problem is that nothing about this merger really makes that much sense or is that straightforward.

For Tesla, the timing is terrible. The company is building its Gigafactory which will allow it to pump out a half-million vehicles per year, a capability it has to have if its Model 3 will be successful. Tesla needs the Model 3 to be a win in order to finally reach profitability and in order to be propelled into becoming a much more significant player in the automotive industry.

Both the Gigafactory and the production of the Model 3 require a lot of cash and a lot of fundraising, and taking on the cash-burning SolarCity will only be a distraction from this work and could end up doing significantly more harm than good for Tesla.

Add to that the idea that with SolarCity’s cash problems, it seems the company is not that far away from bankruptcy.

In the last year, the company has attempted to reduce its high operating expenses that are a result of its rapid expansion, but all it has to show for these efforts are missed growth targets.

Musk has said that SolarCity could raise the capital it needs on its own, dismissing the idea that the company is being bailed-out by Tesla. But then, if SolarCity could raise capital on its own, why wouldn’t it do that instead of taking an all-stock offer in a time when it’s trading at half of what it was earlier this year?

As a SolarCity bankruptcy isn’t all that far away from possibility, it would seem more logical for Musk to wait until it did happen and then buy the company at a steep discount. But again, nothing about this merger makes a whole lot of sense.


Merger Arbitrage

So how can we learn from the Tesla and SolarCity merger?

Normally when a merger is announced, merger arbitrageurs take positions in both the acquiree and the acquirer, with the typical trade being purchasing shares in the target of the acquisition and selling the shares of the acquirer in order to lock in the spread between the two to create riskless profits.

In an ideal scenario, which the merger of Tesla and SolarCity is not, both the acquiree and the acquirer would be fundamentally solid companies.

In an all-stock offer like that of the Tesla and SolarCity deal, ideally, company A, our acquirer, would make an all-stock offer that is above the stock price of company B, our acquiree.

An arbitrageur would sell short their stock in company A, and purchase stock in company B, and when the deal closed, they’d end up with the offer equivalent value of company A’s stock, collecting the spread between the two.

In the Tesla and SolarCity case, that spread is north of 15%, which isn’t bad at all for a short-term trade and there are, understandably, analysts who like the trade.

The problems are that 1) while the deal will probably go through eventually, there isn’t a guarantee that it will go through in the fourth quarter as projected, leaving you with the ever-struggling SolarCity stock, and 2) even if the deal does go through and SolarCity shareholders realize the >15% gain, they are then stuck with Tesla stock.

Since the announcement of the merger, both SolarCity and Tesla have been declining as the general consensus is that the merger is a bad idea. Take a look at this chart from Bloomberg:
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The chart shows SolarCity trading at almost a fifth below Tesla’s takeover offer, demonstrating that investors are losing faith in this deal.

What usually happens in a merger situation is that arbitrageurs buy shares in the target of the acquisition and sell short the acquirer’s shares to lock in the spread between the two, but that’s difficult in Tesla’s case as almost a quarter of the stock’s float is already sold short making borrowing the stock expensive.

Considering the billions in debt that both companies are in and the fact that they are both burning through cash—though SolarCity at a much more concerning rate than Tesla—merging the two companies and their collective problems could spell disaster for Tesla.

Bottom line, if this were a good deal, I’d recommend you buy shares in SolarCity and collect the spread when the deal with Tesla goes through, but it’s not.

What I can recommend is that you keep an eye on news regarding mergers and acquisitions as you never know when an opportunity will come around where you’ll have an ideal scenario for merger arbitrage. It could be a great way to make solid short-term gains, and you may end up owning a really fantastic stock.

source: Kristina Keene, Investiv

Deutsche Bank and Wells Fargo have dominated the headlines lately, and neither for positive reasons.

But these two banks can teach us a lot about investing in a fundamentally good company versus investing in a fundamentally bad one at a point of maximum pessimism.

Before diving into that, let’s take a look at the current situation of both banks.

Wells Fargo has been reeling after weeks of bashing over millions of fraudulent customer accounts created over the last five years in a scheme to collect fees and meet sales targets.

The bank’s CEO was grilled by the House Financial Services Committee this week over the scandal, and it is being fined $185 million—which is the largest fine charged since the Consumer Finance Protection Bureau was created in 2011,—and agreed to pay $5 million in refunds to customers.

Wells Fargo was also just sanctioned by the Justice Department over improperly repossessing vehicles owned by military members, with an alleged 413 violations of the Servicemembers Civil Relief Act.

But the bank has the highest valuation among any bank in the U.S., with a worth just over $250 billion, and Warren Buffett’s Berkshire Hathaway is the company’s biggest shareholder. Not only that, the stock is up 400% since its low at the beginning of the financial crisis.

While customers are fuming, Wells Fargo’s shares are down just 15% this year, sinking below $45 this week, a price it hasn’t hit since February 2014.

Wells Fargo has long been thought to be one of the better banks to invest in as it didn’t have as many ties to shady Wall Street practices as other banks have had, but these recent scandals have rightly made many wonder if big banks make sense as an investment in their portfolios.

The company isn’t the only U.S.-based bank that has struggled this year. Goldman Sachs, Citigroup, and Bank of America are all down roughly 10% for the year. But these losses are nothing compared to those of the big European banks.

Barclays and UBS have sunk more than 30% in 2016, and Credit Suisse is down more than 40% year-to-date.

Deutsche Bank’s story is a particularly fascinating case study. It is Europe’s largest investment bank and it has slumped more than 50% in the past year, and fell to a record low on Tuesday over concerns that the bank may lack the capital to pay litigation costs and meet more strict regulatory standards.

At the beginning of the month, the bank was hit by a $14 billion claim from the U.S. Department of Justice to settle an alleged fraudulent origination and selling of mortgage-backed securities before the financial crisis.

Much of the recent selloff appears to come as a result of German Chancellor Angela Merkel’s statements ruling-out state assistance for the bank.

But unlike Wells Fargo, Deutsche Bank’s troubles aren’t new, and in fact the bank has struggled to recover since the financial crisis, so much so that the stock has sunk to a 30-year low.

The bank has had a sequence of hard-hitting scandals, unfortunate events, and poor decisions. With a $15.8 billion market capitalization, shares of the 147-year old bank now trade for only 8% of the stock’s peak price in May 2007.

In 2009, Deutsche Bank’s then-CEO proclaimed that the company had plenty of capital, and that it was weathering the financial crisis storm better than its competitors.

In truth, however, the bank was hiding $12 billion in losses, and much of the money that the bank was able to make during the time was actually a result of their manipulation of Libor rates, which resulted in eventual fines of $2.5 billion.

Since then, the bank has gone through multiple CEOs, and under its newest leader is attempting a reinvention and a massive overhaul of its operations resulting in the cutting of 9,000 employees and the ceasing of operations in 10 countries.

The chart below from equities.com illustrates the bank’s struggles over the last year alone:
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The series of events in the last six months have been particularly damaging with headline after headline claiming that the bank’s troubles may be insurmountable.

Bottom line, Deutsche Bank is in full-on crisis mode and is a ticking time-bomb.

Stepping back in time to the start of the financial crisis, the comparison between Deutsche Bank and Wells Fargo is striking.

While both companies crashed along with the rest of the market in 2009, one bank—Wells Fargo—gained to 400% from it’s low, while the other has sunk -50% since it’s 2009 low and looks to continue the downward trend.

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The chart above shows the dramatic difference between the course of these two banks since the financial crisis. You can see Wells Fargo’s impressive rise in blue, and Deutsche Bank’s steady demise in red.

The 2009 low for both stocks correlates to the point of maximum pessimism—a term coined by Sir John Templeton—in the financial crisis when things seemed to be at their bleakest.

If we look at Deutsche Bank, after this low, things seemed promising and the stock price rose into 2010 before continuing its descent. In hindsight, this correction as we can now see it, marked the beginning of the end for the multi-national bank and was the start of scandal after scandal, and crisis after crisis.

If we look at Wells Fargo in comparison, after the 2009 low, the price rose a remarkable 400%, and is only now experiencing a short-term decline on its continued ascent.

So what’s the difference between the two and how could investors have picked the better stock at the bottom in 2009?
It really comes down to fundamentals. Despite Wells Fargo’s recent turmoil, the company’s fundamentals are solid. Wells Fargo’s management is quality and the company has maintained consistent dividend payments. And, not only that, but the company has maintained profitable growth, which is a big plus as profitability plays a big role in maneuverability in returning capital to shareholders.

In the midst of the financial crisis, Wells Fargo cut its dividend payment to just 0.7%. This dividend cut, while painful, saved roughly $5 billion per year for the company which helped it navigate the toxic mortgage crisis. It wasn’t until 2011 that their dividend moved north of 1%, but it has now risen to 3.4%.

While it’s impossible to know if Wells Fargo can maintain a dividend yield in the face of the next major crisis—be it the impact of the slowing global economy, a debt crisis, or possible deflation—it’s likely that the company’s management has learned from 2009 and has a plan in place for the next major economic crisis.

Deutsche Bank on the other hand, as discussed above, has gone through multiple CEOs since 2009 and has attempted multiple reinventions in an effort to turn the ship around. And as already mentioned, the bank hid $12 billion in losses in the aftermath of the financial crisis.

While if you had invested in Deutsche Bank at the 2009 bottom and ridden it until its top in 2010, you would have seen a nice return, had you stuck with the stock after that high you would have lost -50%.

On the other hand, If you had invested in Wells Fargo at the same 2009 bottom, you would have seen incredible returns. Only this year would you have started to see a decline.

Now, considering Wells Fargo’s recent scandals, you’re likely thinking you’d be crazy to buy the stock, and right now, you might be correct. The stock has once again fallen to the $44.50 level, a price that marked the intra-day low in both February and June of this year.

By connecting these two lows we can establish a support level from which to work. On Thursday, the price closed at $44.37. As I write this today (Friday), it appears as though Wells Fargo’s share price has rallied a bit, but I believe it will make a second consecutive close below $44.50.

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In true technical fashion, if on Monday we see a third consecutive close below $44.50, I would be confident in declaring a breach of this important support level. I would then be looking for the stock to continue to decline in the coming months, ultimately finding new support around $34-35, a price that marked peaks in 2010, 2011, and 2012, before breaking out to new highs.

One caveat to reaching this level is the 2007 pre-crisis high around $38. This is a level buyers will want to watch closely, as if the stock does find support at $38 and then resumes the uptrend, waiting until it hits $35 would mean missing the entry opportunity.

As I’m watching the stock price this morning (Friday), the stock has rallied slightly, which may mean that the $44.50 level might hold, though that does not mean the level won’t be broken later.

Ultimately, the bottom line is that $44.50 to $35 represents a good to great buying opportunity. In order to buy at a price point within this range, investors may want to sell put options with a strike price of $43 or lower with the hope of the stock price dropping and being assigned shares while also collecting some additional income.

Should the stock price reach around $35, which I expect it will, I believe it would present investors with a great buying opportunity to get a fantastic company at a good value, so keep an eye on Wells’ chart in the coming months.

As for Deutsche Bank, if you still own it, cut your losses now before it runs itself down to penny stock territory.

source: Kristina Keene , Investiv

• Earnings aren’t that important but revenue and customer growth is essential.
  
• The business has to have the capacity to grow without issuing stocks.
  
• Timing is everything with growth stocks.
  

“FANG” is the name that has been given to the elite group of technology stocks that includes Facebook, Amazon, Netflix and Google.

These magnificent 4 have delivered astonishing growth. Since its IPO, Amazon has returned 52,491% (yes, you read that correctly) to shareholders. The other three haven’t quite been that extreme, but have still seen incredible growth, with Netflix returning 9,198% since its IPO, Google returning 1,429%, and Facebook 338%.

What’s especially fascinating is that a big part of those results have come in the last 5 years when each of the FANG stocks were already known globally.

FANG performance in the last 5 years:

This article will investigate the factors that influenced such returns and will try to find patterns that will enable us to recognize a future FANG-like stock when we stumble upon one.


The primary factor behind the amazing returns for each of these companies is growth. Each of the FANG companies have seen their revenue more than double in the last 5 years, with Facebook increasing revenue more than 6 times.

Revenue growth (in millions):

So revenue growth is essential, but this revenue growth doesn’t necessarily translate into earnings growth. Amazon’s revenue grew at a slightly faster rate than earnings, Facebook’s are not comparable to Amazon’s but the growth is significant, Netflix’s earnings growth is still slow and Google’s earnings growth is also slower than its revenue growth.

Earnings growth:

So we know earnings aren’t that important, they don’t necessarily even have to grow, as is the case for Netflix. As earnings aren’t that important, what is important is customer growth as it shows the potential these companies have which should or could turn in to profits in the future.

The numbers that are even more astonishing than the revenue growth numbers are the number of active users. Amazon had 244 million active users in 2014 and has grown to the 305 million it sees currently, Facebook has 1.7 billion monthly active users, Netflix has 83 million subscribers and Gmail users have reached a billion.

Gmail users:

The conclusion is pretty simple: we need to look at a business that is on the brink of profitability which eliminates the needs for capital raises as none of the FANG stocks have had significantly dilutive stock issuances in the last 10 years (FB since IPO). Businesses need to show stellar growth in customer numbers which means they are a simple product to use, better than their competition and set up in a way that can be scaled globally as the potential is what pushes the stock price up.


There is always a risk that something happens in the business model, but the FANG stocks show that you don’t have to invest in the latest hot stock or product. You can wait until the player becomes a global leader and then invest. The amazing returns from figure 1 were achieved even though the companies were already global leaders in their respective fields.

The second risk lies in the fundamentals. Google has a current PE ratio of 30.2, Facebook’s is 62.1, Amazon’s is 196.2 and Netflix’s is 312.8. The ratios weren’t better 5 years ago, with the exception of Netflix who had two bumper years in 2011 and 2012 when the PE ratio fell to 15.7.

Netflix 2011 troubles:

Amazon also provided great investment opportunities when its PE ratio was below 100 in the period from 2006 to 2011. In any case, the better the valuation a growth company has, the less risk you run.

The third risk is volatility. As in the above figure, 25% moves up and down is something that should be expected. Any kind of disappointing news creates a selling spree as the companies have no fundamentals to limit the damage. On the other hand, the growth, which is unrelated to economic circumstances, makes such companies a good play in times of economic turmoil. All FANG stocks fell during the 2009 crisis but as soon as liquidity returned, they quickly rebounded and returned to growth.

FANG stocks during crisis:

Another risk is that the management is not yet that competent except for the huge leverage they get from their growth. We have plenty of examples for this, examples like the Fire phone that was a flop for Amazon, or Facebook paying $19 billion for WhatsApp. The growth in other sectors helps covers for such blunders.


Every investor would love to have a FANG-like growth stock in their portfolio, especially if bought around that stock’s IPO. You can imagine enjoying the 100 bagger returns that would enable you to easily beat the market.

We’ve discussed what to look for and the risks this kind of investing implies, but every company is unique and has its own risks that can’t be assessed by ticking boxes on a check list. Investing a small percentage of your portfolio in companies that might become the next FANG stocks might be a nice exercise and could spice up your portfolio, but be ready to write off the complete investment if something goes wrong.

An example of buying growth stocks at the wrong time is the CIMQ stocks of the dotcom bubble. Cisco, Intel, Microsoft and Qualcomm were the stars of that market, but investors who were late to the game lost much of their investments, which again demonstrates how important timing is when investing in growth stocks.

Intel’s stock price:

Growth stocks are a completely different investing world than the standard investing concept of discounting future cash flows, current valuations and debt ratios, and are therefore much riskier. On the other hand, without taking those risks, your portfolio is missing out on the companies that are shaping this century.

source:Kristina Keene , Investiv