Technology

Why Mega-Cap FANG Tech Leaders May Be Offering Investors Incredible Value

Lee Jackson

Published: March 29, 2019 7:10 am

Last Updated: January 30, 2020 10:42 pm

You can always tell when the election cycle starts to heat up. With the presidential election coming next year, the rhetoric from the candidates has ratcheted up over the past six months. The calls from Washington, D.C., especially from some of the announced Democratic presidential candidates, to “break up” big technology firms are very typical. They are populist attempts to get angry voters to nod and agree and back their efforts.

As we have noted before here at 24/7 Wall St., big corporate breakups have happened before, most notably with Ma Bell in the 1980s. As a refresher course: The breakup of the Bell System was mandated on January 8, 1982, by an agreed consent decree providing that AT&T Corporation would relinquish control of the Bell Operating Companies that had provided local telephone service in the United States and Canada up until that point.

While some of the fury directed at mega-cap technology companies may be legitimate, especially when talking about the many privacy issues that have been uncovered, these companies also have provided hundreds of thousands of high-paying jobs, paid billions in taxes and made our lives easier, more enjoyable and, in many cases, simpler.

Merrill Lynch still likes the big tech FANG namesake companies, so we decided to look at the FANG stocks they cover. All remain Buy rated, and they are still solid ideas for aggressive growth accounts.

Alphabet

The search giant continues to expand and, while search is king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.

Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.

Back in the fall, Google outlined expanding capabilities to facilitate commerce, capitalizing on the “treasure trove” of data provided by seven different properties, each with at least a billion active users (Android, Search, Chrome, Maps, Play, YouTube and Gmail). Smart shopping campaigns leverage machine learning to make sense of touch points along the consumer purchase path, including better offline attribution capabilities (locally oriented searches up 200% over past two years) and improved purchase conversion rates (20% on average).

The Merrill Lynch price target for the stock is $1,350, and the Wall Street consensus target is $1,343.80 The stock closed Thursday at $1172.27 a share.

Amazon

This is the absolute leader in online retail, and recently it opened its first brick-and-mortar store in New York City. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.

The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.

Consistent with data from 2018, digital marketing users overwhelmingly cited Amazon as the fastest-growing channel for advertising budgets. Many retailers also are leveraging their Amazon advertising data to retarget users on other channels (namely Facebook) to drive traffic and sales to their own websites (bypassing Amazon marketplace or FBA fees).

Merrill Lynch has a $2,100 price target, while the consensus target is $2,080.05 The stock closed at $1,773.42 on Thursday.

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Facebook

The huge social media leader has been incredibly volatile and had an absolutely wretched 2018. Facebook Inc. (NASDAQ: FB) is the largest social network with over 2.0 billion monthly active users and over 1.4 billion daily active users. The company generates revenue from advertising and from payments, with over 95% of revenue from advertising. It generates close to 50% of revenues in the United States and Canada and is expanding rapidly in international markets.

The company’s solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application for mobile and web on various platforms and devices, which enable people to reach others instantly, as well as enable businesses to engage with customers; and WhatsApp Messenger, a mobile messaging application.

Despite the terrible earnings results posted last year and other negatives that caused the shares to sell off a massive 43%, Facebook is used by some 60% of small businesses, which utilize the company’s advertising platform in some way for their businesses. The ability to grow that number is a huge positive for the beleaguered social media giant.

The $187 Merrill Lynch price target compares with the $196.07 consensus target. The shares were last seen trading at $165.55 apiece.

Netflix

This Wall Street darling could still offer solid upside despite newly announced streaming competition. Netflix Inc. (NASDAQ: NFLX) is the world’s leading internet television network, with more than 120 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.

Netflix is available on virtually any device with an internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on the available bandwidth. Many of its titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they will love.

Merrill Lynch has set its price target at $450. The consensus target is $382.97, and the shares closed most recently at $354.61.

Make no mistake, the political rhetoric will get louder, especially next year. Some of these companies actually may have to spin-off certain business silos. However, the fact remains that they all dominate their specific technology and internet silos in various ways, and while they may remain volatile, for those with higher risk tolerance they offer very good entry points, especially on any forward weakness.