A volatile 2018 took a sharp bite out of FAANG stocks — including Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. — and analysts are bracing for what could be another rough year for big tech.
Tech companies stumbled last year amid data privacy scandals, trade tensions with China and widespread calls for privacy regulations from lawmakers across the globe. Facebook saw the largest decline among the five FAANG stocks, ending 2018 down 25.7%. Apple followed, losing 6.8%, despite becoming the first public U.S. company to reach a $1 trillion market capitalization.
In comparison, Alphabet's stock was largely unscathed, off by less than 1% in 2018. Netflix and Amazon, meanwhile, delivered the largest gains for the group, jumping 39.4% and 28.4%, respectively.
FAANG faith waning
Analysts are now wondering whether the FAANG powerhouse stock performances of previous times are unlikely to return in 2019.
"You can't go in and blindly buy a FAANG stock or the FAANG group as a whole and do well," Daniel Morgan, a senior portfolio manager at financial services firm Synovus Trust, said in an interview.
Morgan expects Facebook and Alphabet to encounter the greatest headwinds in 2019, given the increased scrutiny from regulators the companies have faced regarding their handling of user data. However, Alphabet has the slight advantage over Facebook because of its diverse portfolio outside of social media, he said.
Facebook faced a handful of data privacy scandals in 2018, most notably involving the now-defunct data firm Cambridge Analytica LLC, which improperly accessed millions of users' private data. Disclosures regarding Cambridge Analytica set off a storm of criticism from lawmakers around the world and led to a flurry of investigations.
Similarly, Google announced last year it planned to shut its Google+ social network after the firm twice discovered a bug that impacted millions of Google+ users. Google was also required to pay several billion dollars in fines to European regulators in 2018 after the firm was found to have violated EU antitrust laws related to its Android mobile operating system.
For its part, Apple spent much of 2018 getting to grips with fallout from global trade war fears and a maturing smartphone market.
But according to Gene Munster, a managing partner at Loup Ventures, Apple has a few growth prospects in 2019, with Apple Music, iCloud computing service, along with its MacBooks, iPads and wearables, helping it to diversify beyond its core iPhones.
Apple faced the effects of global trade war fears and a maturing smartphone market in 2018. The company also in January suddenly lowered its revenue forecast for the crucial holiday quarter, citing softening iPhone demand in Greater China.
While Munster acknowledged that some investors now consider Apple stock as "broken," he instead suggested the company is at a "crossroads." Going forward, Apple should either look into developing a new product category, pursue large M&A deals or develop a more aggressive buyback strategy in order to "persuade investors to think differently," Munster wrote in a report for clients.
More growth expected for Netflix, Amazon
Regarding Netflix and Amazon, analysts largely agree both companies should continue to deliver solid growth results in 2019.
Goldman Sachs analyst Heath Terry in a Jan. 4 research note said Netflix represents one of the most compelling investments this year, reiterating his "buy" rating on the shares as well as his $400 price target.
While Terry conceded that Netflix's high level of cash burn will likely force the company to return to the high-yield debt market over the next few years, he sees Netflix on a path to both double its annual content investment and generate positive cash returns by 2022. Netflix executives in October 2018 guided for Netflix's annual cash burn to reach about $3 billion for full year 2018 and to plateau at that level in 2019.
"We continue to believe Netflix's investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally," Terry wrote.
For Amazon, the e-commerce giant's formidable lead in the retail industry as well as in cloud computing makes it a top pick in 2019, said Michael Kramer, founder of investment advisory firm Mott Capital Management.
Amazon's AWS business, which provides subscription-based cloud computing platforms to individuals and organizations, remains a leader in the cloud market. For the quarter ended Sept. 30, 2018, revenue from AWS grew nearly 46% year over year to $6.68 billion.
Describing Amazon's services as an increasingly "permanent fixture in people's lives," Kramer said in an interview that the company is "a great growth story for the next five to 10 years."