FAANG is it time to invest in technology companies again

FAANG: Is it Time to Invest in Technology Companies Again?

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Tech leaders seem to be back on the scene, not as overvalued stocks to avoid, but as real opportunities.

As you will see, the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are now much more attractive than they were a few years ago. And I also believe that some of the big tech stocks deserve a place in your investment portfolio.

Grow the company and get closer to the stock.

When I was a kid, my parents used to buy me shoes a size bigger. I was growing fast, and they knew they wouldn’t last long. In fact, some of those pairs would outgrow me before I wore them out.

In many cases, the quotes from the mega-capitalised FAANGs were similar to my one-size-plus shoes. At first, they were too “big” (expensive, in financial terms). But as time went on, the companies essentially grew and those values became more appropriate.

Today, some of them look attractive compared to the results they generate. In other words, you can now invest in a few names without paying exorbitant prices and without the risk of the shares plummeting to a more reasonable valuation.

How did this happen?

Well, whenever you have a paper price well above what would normally be considered reasonable, the situation can be resolved in two ways.

On the one hand, the stock could trade at lower prices. This usually happens when a bubble drives up prices and then investors panic and sell. Such bubbles can often be very painful and cause some of the most vulnerable investors to lose a lot of money.

The good news is that it doesn’t always have to end that way. Sometimes, a company can increase in valuation. It’s like when my feet grew into shoes a size bigger. As a company grows, and generates more revenue, it can expand until its shares reach the price the market has given it.

For this to happen, the company’s earnings must increase faster than its share price. Over time, the two situations catch up, giving investors a more balanced opportunity.

Let’s now take a look at two of these mega-cap tech stocks. I want to show you how these companies evolved to live up to their (high) share price.

Alphabet: earnings outperforming the stock

As you can see in the chart below, Google’s parent company, Alphabet Inc. (GOOG), has traded steadily higher over the past year.

But what you can’t see on the chart is the company’s rapid underlying earnings growth, coupled with a highly optimistic expectation that it will continue to grow in the year ahead.

The solid growth in GOOG’s fundamentals led Wall Street analysts to project earnings of $95 per share for the coming year. So, at GOOG’s current price of around USD 2,745, investors are paying just under 26 times earnings for the asset. While this could still be considered expensive, it is a far cry from the P/E (price to earnings) ratio that investors had to pay in the past.

Another factor driving investors’ success is the fact that Alphabet has been using its cash to buy back shares. This has taken paper out of circulation, which means more earnings per GOOG share held by investors. As long as this trend continues, GOOG will remain a great investment for years to come.

And now that the company has grown and caught up to the high value of its stock, I believe the stock is a much more attractive investment.

Apple’s rise

While GOOG stock continued to climb over the past year, Apple Inc (AAPL) has had a rocky ride.

It can be boring to hold a stock that doesn’t move for months. But if you look at AAPL’s fundamentals, there is a lot of optimism. Apple shares have been soaring. In fact, over the past 12 months, AAPL’s earnings per share are up more than 40%.

Looking ahead, Wall Street analysts expect the company to post earnings of $5.35 per share. And, based on the current price of around $148, the stock trades for less than 25 times its expected earnings.

Again, not a cheap price for any stock. But given the consistency of AAPL’s earnings growth, the company’s rising dividend and the stability of Apple’s business, its shares now look very attractive.

Having a balanced approach to investing will always be the cornerstone of success. But, at a time when large-cap tech companies are starting to catch up to their share prices, I believe these large companies deserve to be considered as part of your overall investment plan.

 

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