MAANG Stocks Is Not A Farmland?

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The MAANG stocks (formerly known as FAANG) are among the biggest gainers in the stock market. Many investors see this group of stocks as safe ways to invest in growth. Anyone who bought the FAANG stocks during their respective IPOs could be retired today.

However, just because stocks perform well and seem like safe growth plays doesn’t ensure that trend will continue onward. We have numerous examples of stocks that generated life changing returns only to stay flat for multiple years.

Some stocks even enter a lost decade phase where they stay flat. IBM is a good example of a flat stock. With the exception of an 18% YTD surge, IBM had a lost decade. You might as well stashed your money in the bank instead of holding onto the stock. If you bought IBM during its 1999 high and held on, you had two lost decades.

The company has since matured, and its 4.5% dividend yield is the evidence. You only see high yields when a company is mature and has exhausted most of its growth opportunities.

IBM’s revenue has been flat at roughly $70B over the past few years, so it’s no wonder the stock is down roughly 3.6% over the past 5 years. Dividends put you in the positive, but it’s safe to say investors have higher expectations for their money over any five year stretch.

Apple has also seen its revenue flatline. However, rather than stopping at roughly $70B, Apple generated $274B in 2020. This comes after $260B in revenue in 2019 and $265B in revenue in 2018. Although the company is massive, that revenue growth isn’t inspiring, and yet the stock has more than tripled during that timeframe.

To the FAANG stock’s credit, the other stocks on the list have growing revenue. Granted, the revenue growth rates are decelerating, but the growth rates are still decent. Amazon is the only one breaking past 25% revenue growth. Most of the FAANG stocks are in the 20% annual revenue growth stage.

How many years can that continue? Can Amazon’s stock price keep going up 20% each year. If it were to maintain that growth rate for the next 10 years, we’re talking about a $10.8T market cap.

Amazon is a solid growth company, but what point does the market cap get insane? The Fed aside, it’s not like that type of money pops out of thin air.

The market cap issue isn’t exclusive to Amazon. Apple carries a $2T+ market cap and Google is on its way to achieving the same milestone. Facebook is practically at the trillion dollar level and the ‘laggard’ Netflix is at roughly $250B.

Do you see all of these companies being worth $3T, then $4T, then $5T, and then $10T? In my opinion, we’ll soon see one of these companies hit the $3T level. Anyone investment into an index fund primarily goes to FAANG stocks, so that catalyst will continue aiding the FAANG stock prices.

However, decelerating revenue will make a dent on high valuations. Their valuations aren’t as high as hype growth stocks, and you can currently make the argument that most if not all of the FAANG stocks are currently undervalued.

You can only cater to so much of the world. At what point does revenue grow at a snail’s pace? At what point does the stock price correspond with that?

The FAANG companies are all fighting with each other, and more competitors are entering the space. That should also affect revenue albeit in a small way relatively speaking.

Lost Decades Aren’t New For FAANG Stocks

Apple and Amazon aren’t strangers to lost decades. If investors bought at the wrong time, they saw their investment stay flat for 10 years. Of course, if they sold at that time, they missed out on life changing gains. However, a lost decade is still notable.

While not part of the FAANG acronym, Microsoft often gets thrown into the FAANG conversation. Let’s look at their stock chart…

Let’s talk about the two red rectangles. The first one is the massive run up in the late 1990s as part of the dot-com bubble. If you bought at the high, it took more than a decade to see a positive return on your investment.

If you bought the stock in 2001, it still took a decade to see a positive return on your investment.

The second red rectangle gives us a snapshot of Microsoft stock over the past few years. It’s been an incredible ride for MSFT shareholders and FAANG holders in general. The danger is expecting this will continue forever.

Microsoft and the FAANG stocks are far stronger companies than they were in the 1990s (not all of the FAANG companies existed back then either). However, there comes a point when a growth company exhausts its opportunities. Businesses reach critical mass and have a more difficult time growing.

Microsoft and Apple already offer dividends. It’s a sign they don’t know what else to do with those funds. You don’t see high growth companies offer dividends because they need all of that capital (i.e., >30% revenue growth). Amazon and Google will soon offer dividends, probably a few years from now. Netflix will be the last of the bunch to offer dividends if they ever go that route.

Don’t Panic

I think FAANG stocks will eventually experience a lost decade, but we aren’t there yet. The red flag will emerge when these companies produce single digit revenue growth. That amount of deceleration would make future stock price jumps more difficult to justify.

And when a company produces $100B+ in annual revenue (or even more for some of these companies), it becomes a lot more difficult to see double digit revenue growth.

It’s far more difficult going from $100B to $110B than it is to go from $100M to $110M. This is why I personally lean towards mid-cap growth stocks for my portfolio, but to each their own.

I still have some FAANG stocks in my portfolio, and while I don’t plan to buy more anytime soon, I’m definitely not selling out of any positions. This is just food for thoughts because while a lost decade sounds scary, it wouldn’t be the first time for some of the FAANG stocks.

Thank you for reading.