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Amazon, Alphabet, and Facebook: Buy Them Now
Sometimes the Nifty Three tech stocks seem to be the only ones that matter. Should you hold them for the long term? You bet.
By TIERNAN RAY
July 30, 2016
Welcome to the nifty three— Amazon.com, Alphabet, and Facebook —which some days seem to be the only tech stocks that matter.
With higher valuations than the market—and, in fact, nosebleed territory for Amazon (ticker: AMZN)—it’s tempting to call the trio a stock-trading fad.
Yet the gains aren’t extraordinary this year, they are merely better than average, and while valuations have gone up slightly in the case of Amazon, they have basically stayed the same for Alphabet (GOOGL) and actually declined for Facebook (FB). These three names are seeing price appreciation because they dominate their respective businesses. They have challenges that may slow their amazing growth, but nothing to make one refrain from owning the best-managed assets in tech.
The share price gains of the Nifty Three this year have been mixed, with Facebook up almost 19%, and Amazon up more than 12%, beating the Standard & Poor’s 500 index’s gain of a little over 6%, while Alphabet stock has treaded water, up just 2%. They all trade near their all-time high prices.
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Those performances aren’t the best among tech— Hewlett Packard Enterprise (HPE), for example, is up 38% this year, and its cousin, HP Inc. (HPQ), is up 19%. But these three companies are set apart by growth rates that have shot up quarter after quarter for sales, and, with the exception of Amazon, for profit. Individual lines of business are working for each to prop up the top line, making them clearly dominant in their markets, and that’s what investors care about.
Driven both by gobbling up retail market share, and by faster growth in its cloud-computing business, Amazon’s revenue growth rose from 20% in the June quarter a year ago to 31% this quarter. Likewise, Alphabet’s growth rose from 13% a year ago to 22% this quarter, while Facebook’s rose from 39% a year ago to 59% this quarter.
AMIDST THAT GROWTH, the stocks haven’t seen much rise in valuations. Facebook trades at 32 times the $3.86 per share estimated for this year, and 25 times the $4.94 per share estimated for next year, down from 37 times and 28 times, respectively, the materially lower estimates that existed back in December when the stock was at $104.66.
Alphabet trades for 23 times the $34.13 per share estimated for this year and roughly 20 times the $40.42 estimated for next year, about the same as it was back on Dec. 31, with similar estimates at the time.
Amazon trades for 69 times this year’s estimate for $10.93 per share in adjusted, non-GAAP earnings, and 48 times the $15.97 estimated for next year, up from 68 times and 45 times the materially lower estimates that existed back in December. (Mind you, on a GAAP basis, the current multiple is actually a wrenching 130 times this year.)
The challenges that face these companies are worth noting, though they aren’t the kind that will necessarily be show-stoppers. Google faces a decline in the growth in advertising on its owned and operated properties. Likewise, Facebook last week warned investors that it has added a lot of advertisements to its users’ timelines, which has helped spur ad sales. But the company plans to taper off by the middle of next year, which Chief Financial Officer Dave Wehner warned will then start to make growth harder to come by.
Amazon, too, has driven its sales in part by signing up more and more households to its Prime subscription service. Maybe that will cool, with the company now having over a third of U.S. households, by one analyst’s count. But when it cools is anyone’s guess.
All great companies face challenges, and stretched valuations can lead to disappointment and a share-price correction in a given quarter. But the fundamental trend for the three is they continue to be the best at what they do in their respective fields, and that will continue to drive stock gains.
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