AI Volatility Predictor: FAANG

RoboStreet – March 29, 2018

Tech Sector DeFAANGed as First Quarter Comes to a Close

There is no way to put a positive spin on the carnage in what has been the torch bearer for the stock market during the past three years. While there are some major winning stocks in several sectors, the most successfully ‘crowded’ trade has been to be long what come to be known as the FAANG stocks. The are made up of Facebook, Amazon, Apple, Netflix and Google (now Alphabet). The group has been a juggernaut and has a tremendous influence on the volatility of the broader market.

As of Mar. 20, 2018, the market capitalization of these companies summed up to $472.38B + $760.36B + $888.66B + $136.92B + $757.54B = $3.015 trillion. The S&P market cap in total is 70 to 80 percent of the total U.S. stock market capitalization, and the FAANGs, by order of market cap, rank 4^th, 3^rd, 1^st, 67^th and 9^th on the index. This means that a collective up (or down) movement in these tech shares will lead to an increase (or decrease) in the S&P 500 index.

Each of these FAANG stocks has had its own set of issues during the first quarter of 2017. Facebook is seeing a huge fallout of user confidence after the Cambridge Analytica scandal. After revelations that Cambridge Analytica accessed millions of Facebook users’ data without their knowledge, embattled CEO Mark Zuckerberg is apologizing.

This comes as Facebook confirms that it has the ability to track your phone calls and text messages if you have an Android device, and more lawmakers call for Zuckerberg to testify before Congress. Shares of Facebook have declined 23% during the past month, most of that occurring in the past two weeks.

Amazon is the latest victim of the ‘crowd’ trying to lighten up their positions. President Trump took direct aim at Jeff Bezos and his company this week. The online retail giant’s stock tanked this past Wednesday following a report that Trump is “obsessed” with the company and muses about targeting its tax treatment or building an antitrust case against it.

Trump posted on Twitter –  “I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!” Shares of Amazon have shed 12.3% since hitting an all-time high of $1,617.

Apple shares came under pressure after the steel and aluminum tariffs were enacted by the Trump administration. Apple’s iPhones and other core products are assembled in China and the threat of retaliation by China cast a dark cloud over the stock that pressured the shares lower by 9.2% from its March high of $183.50.

Netflix’s stock valuation has been a constant source of debate for years, currently trading at PE ratio of 123x, rich by almost every measure no matter what kind of business model it is. With the tech sector coming under heavy fire its shares suffered a 17.6% hit from its recent all-time high of $334.

And then there is Google, what many critics consider too dominant a force of influence on the Internet. The company has a 94.6% share which implies incredible leverage with their advertisers and content control. Several disgruntled former employees have expressed “group think” being ingrained in what is widely known as a hyper-liberal company culture value system where expressions of other views are not welcome and can lead to being ostracized or being shown the door.

This Orwellian behavior has roots also at Facebook and Twitter, where stories that are trending that have a conservative bent are being filtered out. If the federal and state governments come in and slap new regulations and oversight on these companies, it’s their own fault for practicing elitist arrogance in an attempt to shape a specific narrative that damages the very fabric of a society where the first amendment to the United States Constitution guarantees the rights of free expression, free speech and action that are fundamental to democratic government.

So, are the FAANG stocks in a bubble that is bursting? I don’t think so, but some of the shine has come off the veneer this group displayed for so long. Instead, I see shares of Microsoft, Intel, Cisco Systems, Applied Materials, Salesforce and other fundamentally and technically sound tech stocks benefiting from the deleveraging of FAANG from fund manager portfolios. Money earmarked for tech has to go somewhere and big cap liquidity is primary to stock selection.

While investors have been watching Amazon and Apple in the race to $1 trillion in market capitalization, Morgan Stanley is betting on Microsoft to reach that milestone in the next 12 months thanks to cloud adoption.”Strong positioning for ramping public cloud adoption, large distribution channels and installed customer base, and improving margins support a path to $50 billion in EBIT and a $1 trillion market cap for MSFT,” Morgan Stanley’s Keith Weiss wrote in a note to clients Monday.

The investment bank raised its one-year price target from $110 to $130, 50% higher than where the stock currently trades. At a share price of $130, Microsoft would be worth $1 trillion. Its current market value is $692 billion compared to Apple at $860 billion, Amazon at $684 billion and Alphabet at $717 billion.

From my proprietary AI system, shares of Microsoft might get to $130 inside twelve months. In fact, assuming the market stabilizes, my AI data supports a six-month price target of $117 that would certainly set the table for a run to $130 by year-end. Below is the table in my Stock Forecast Toolbox that highlights this glowing prediction.

As investors search high and low for “the next Microsoft”, sometimes the 800-pound gorilla in the room, code name Mr. Softie, is still the biggest and best trillion-dollar treasure chest to own at the end of that hunt.