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Stocks  | January 1, 2020

In recent years, the ‘FANG stocks’ have been seen as perhaps the most important stocks in tech. The group of large-cap names has garnered substantial media coverage and investor attention. With a combined market capitalization over $2.5 trillion, the four stocks literally can move markets.

That said, it does seem like the group lost a bit of its luster in 2019. Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) have been the stars of large-cap tech, gaining 80% and 55% respectively. Apple’s run literally has been unprecedented, and those two companies now stand alone with market capitalizations well past $1 trillion.

Still, FANG stocks are widely-owned by tech investors in particular, and key components of index funds of all kinds. And they still can move markets. These four stocks will matter next year, as they have for most of the past decade. Investors should consider where how the FANG names are positioned heading into 2020.

Facebook (FB)

2019 was much kinder to Facebook (NASDAQ:FB) stock than 2018 was. Facebook stock has gained 56% so far this year after a 25.7% decline last year.

The combination actually has led FB stock to underperform. Since the beginning of 2018, the stock has been the weakest performer among FANG stocks. Its 16.2% increase is below that of the NASDAQ 100 (36%) and the broader NASDAQ Composite (29.7%).

After two mixed years, Facebook heads into an important 2020. Facebook stock has returned to July highs, but valuation looks attractive. That said, the risks are real, as I detailed earlier this month. Regulators are circling. Facebook’s reputation has taken a hit with users, even if defections appear minimal.

But the most important factor in 2020 trading might well be the company’s spending on its platform. It was guidance for higher expenses that drove the weak 2018 performance, as FB stock posted the largest single-day loss of market value in the history of the stock market. Right now, not even Wall Street is sure what to expect on that front next year. Consensus earnings per share estimates for next year have a wide range: the low estimate is $7.63, and the highest projection above $11.

Spending will determine where the actual numbers come in. And FB stock looks very different at the respective ends of that EPS range. Toward the low end, the company posts minimal earnings growth over two years (after a 2019 decline). The multiple assigned Facebook stock probably compresses as well, and shares could near $150. (18x $7.50 in 2020 EPS, plus $20 or so in cash on the balance sheet, would get to $155.)

At the high end, Facebook seems back on track. The multi-year growth rate returns to the double-digits. Margin concerns ease. And there’s a not unreasonable case for a share price over $300, based on a 25x P/E multiple, plus that cash. Q4 earnings likely will include some commentary on spending — which means 2020 trading in FB stock could be shaped right out of the gate.

Amazon (AMZN)

Amazon (NASDAQ:AMZN) stock is limping into 2020. AMZN stock is down 12% from July highs, and has been stuck in a range since a sharp sell-off following that month’s second quarter results.

Here, too, expenses are a key issue. Amazon is spending hundreds of millions of dollars a quarter on its launch of one-day shipping. With brick-and-mortar rivals Walmart (NYSE:WMT) and Target (NYSE:TGT) successfully leveraging their store bases, investors seem worried that Amazon’s margins are going to face permanent pressure.

It remains to be seen whether Amazon can assuage those worries. But one key reason for concern in the first half of next year is that the company still has three quarters left in which those shipping expenses will pressure earnings. Even if AMZN bulls are right in seeing one-day shipping as the right move, it likely will take until July for that prediction to be proven correct. In the meantime, sideways trading in Amazon stock may persist.

Netflix (NFLX)

Perhaps surprisingly, it’s Netflix (NASDAQ:NFLX) that’s been the best of the FANG stocks since the beginning of last year. NFLX stock has gained a tidy 74% over that stretch, though the majority of the upside came in 2018.

For Netflix, 2020 probably will be less about expenses than subscribers. Admittedly, that’s been the case for some time now, as investors seem confident that Netflix will be able to pull back on content spending and generate enormous per-user free cash flow at maturity.

But subscriber numbers have added importance in 2020, as competition intensifies in the U.S. market. Disney (NYSE:DIS) already is off to a strong start with its Disney+ service. AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) will launch their streaming services next year.

To be sure, NFLX stock has rallied of late despite strong Disney+ numbers, as investors seem to believe the two content giants can successfully co-exist. But if Netflix numbers show signs of stress once new competition hits the market, that confidence will fade — and so will Netflix stock.

Alphabet (GOOG) (GOOGL)

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), both as a company and a stock, seems like the quietest of the FANG stocks. GOOG stock basically has tracked the NASDAQ indices, though it has modestly underperformed both YTD and since the beginning of 2018.

Alphabet hasn’t had an earnings report like Facebook’s Q2 2018 or Amazon’s Q2 2019. As it has been for this entire decade, Alphabet’s business remains centered on Google search.

So the question looking to 2020 is: what will change? There are some potential catalysts that could lead GOOG stock to outperform other FANG stocks and the market as a whole. The company’s Waymo self-driving car unit could help the stock, particularly given that Tesla (NASDAQ:TSLA) has soared to new highs. Google is trying to catch Amazon and Microsoft in cloud, and progress on that front could create a secondary growth driver.

To be sure, the last two years haven’t been bad for Alphabet stock. But bulls no doubt were hoping for performance that at least beat the market. For that performance to arrive in 2020, Alphabet may need a better story to tell.

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