Saturday , 13 August 2022

FAANG’s Ancillary “Partner” Stocks Have Outperformed YTD

The prominence of the 5 FAANG stocks – Facebook parent Meta Platforms (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Google parent Alphabet (GOOGL) has resulted in valuations and share price gains that have outstripped profit growth, making them unappealing to value-minded investors. Fortunately, however, you can partake in their impressive business models without having to pay exorbitant share price by buying shares of ancillary businesses, i.e. those companies that provide products or services to these companies and thus benefit peripherally from the group’s phenomenal growth.  Let me explain.

By Lorimer Wilson, Managing Editor of munKNEE.com

Below are 5 such companies that are riding the coattails of their mega-cap partners to outsized top- and bottom-line growth, and valued at cheaper price-to-earnings (P/E) multiples than the FAANGs they partner with, suggesting these names may still have room to run.

1. One of Facebook’s major ancillary partners is Zynga (ZNGA).

  • Zynga develops, markets, and operates social games as live services played on mobile platforms, such as iOS and Android, and social networking sites, such as Facebook. The company’s portfolio of gaming titles has been downloaded more than 4 billion times on mobile devices and now reaches customers in over 175 countries.
  • The stock had been trading at $10.63 at the end of June (+7.7% YTD) but when the Q2 financial results were released on August 5th in which management said it had become more cautious about its forecast for the coming quarter and the full year and that, on top of that, and partly because of it, Zynga would be delaying the launch of Farmville 3 from the third quarter to the fourth quarter and the launch of Star Wars: Hunters from 2021 to 2022, the stock sank 18.2% the following day down to $7.99. It has continued to decline since then as a result of the negative impact of Apple’s new privacy changes in iOS 14.5 that limits app developers’ ability to track users across apps for advertising purposes but Zynga is successfully navigating around this headwind, as its Q3 financial results above attest, making the stock a great buy at these lows.
  • Q3 financial results showed that:
  • revenue surged 40.2%, in line with its average annual revenue growth of 45% over the last three years,
  • bookings (an important sales metric that accounts for changes in deferred revenue) increased by a record 99%,
  • average mobile monthly active users soared 120%,
  • adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased more than fivefold and its
  • cash and investments on hand at quarter’s end was $1.3B which it says it will use to fund future acquisitions.
  • As a result of these strong results and the positive ongoing gaming trends Zynga management has lifted its full-year sales and profit forecast and now expects the company to generate revenue and adjusted EBITDA of $2.78 billion and $616 million, respectively, in 2021 which is up from a prior projection of $2.73 billion and $575 million.
  • Facebook is UP +18.8% YTD while Zynga is DOWN -38.9% YTD but is expected to bounce back in price going forward. Buy the dip??

2. One of Apple’s major ancillary partners is Qualcomm (QCOM).

  • Qualcomm is a key chip supplier for Apple’s 5G enabled iPhone 12 and iPhone 13 as devices powered by its chips downloading content roughly 67% faster than the next largest competitor.
  • In addition to being an Apple supplier QCOM is hedging its bets by making big investments in the Internet-of-Things (IoT) and in connected cars.
  • Q4 financial results showed that Qualcomm’s:
    • revenues year-over-year increased by 43% to $9.3 billion,
    • adjusted earnings per share increased 93% year-over-year to $2.55,
    • and, going forward, the company expects revenues of $10.0 billion to $10.8 billion and adjusted EPS to arrive between $2.90 and $3.10.
  • Most of Qualcomm’s profit actually comes from licensing patents to other companies (including smartphone makers like Apple and Samsung) and receives a bit of money pretty much every time a smartphone is sold. While smartphones are plateauing in growth, the addition of new patents for 5G and the explosion of new devices in IoT should continue to drive growth for Qualcomm.
  • With QCOM trading above its recent breakout level and above rising monthly moving averages a number of analysts suggest that any pullback below its breakout level would present a low-risk buying opportunity.
  • Apple is UP +25.3% YTD while Qualcomm is UP +20.2% YTD

3. One of Amazon’s major ancillary partners is Prologis (PLD).

  • Prologis, the world’s largest warehouse real estate investment trust (REIT), owns roughly 4,700 properties totaling nearly 1 billion square feet of leasable space with operations across 19 countries and Amazon is PLD’s largest tenant, by far, contributing $49.4B to PLD’s revenue in Q3.
  • The e-commerce tailwinds that help Prologis show no signs of slowing. Online purchases in the U.S. are forecast to rise from 14.5% of all retail sales to 18.1% of retail sales in three years and this trend could fuel demand for a doubling of required warehouse space by 2025.
  • Prologis has consistently ranked among the best-performing REITs in the warehouse sector. On an annual basis, core FFO (funds from operations, a key REIT earnings metric) per share has risen 10% and dividends have risen 9% over the past five years.
  • Q3 financial results showed that Prologis’:
    • core FFO per share growth increased approximately 7% in 2021, supported by an industry-leading balance sheet and a land portfolio with an estimated $21 billion buildout potential.
  • According to CFRA Research fundamentals point to an enviable supply-demand situation heading into 2022 suggesting substantial appreciation going forward.
  • Amazon  is UP +7.7% YTD while Prologis is UP +53.7% YTD (which, interestingly, is 24.7% above its average consensus analyst price target which would still put its price UP +17.8% YTD).

4. One of Netflix’ major partners is Roblox (RBLX).

  • Roblox, which started trading on the New York Stock Exchange on March 10, 2021, develops on-line gaming platforms that offer users an immersive, virtual 3D experience.
  • Q3 financial results showed that Roblox’:
    • total revenue increased 102.2% year-over-year,
    • GAAP earnings per share were -$0.13,
    • free cash flow rose and
    • saw a 31% increase in average daily active users from a year ago fueled by last year’s pandemic-induced lockdown with management anticipating another EPS beat in Q4.
  • RBLX currently generates more than 85% of its revenue from the US, Canada, and Europe but has significant potential for international market expansion, especially in China and, while Roblox earns most of its money by selling its virtual currency to platform users, but it plans to monetize its existing user base to a greater extent in the future.
  • According to Morgan Stanley, Roblox shares remain in a bull market, and if the price jumps above $135, the next target could be around $140 resistance. The stock is currently trading around $126/share. The stock surged more than 40% in the wake of its solid third-quarter earnings report, so this may be one to watch for an entry point on price weakness.
  • Netflix is UP +18.7% YTD while Roblox is UP +81.4% YTD

5. One of Google’s major partners is Workday (WDAY):

  • WDAY has become the industry leader in cloud-based software that helps companies manage finance, HR and strategic planning functions with more than 55 million users worldwide and claims of over 50% of Fortune 500 companies as customers.
  • Workday has partnered with Google Cloud which is expected to spur growth for both companies and the multi-year deal also includes co-marketing and cross-selling programs to increase new business opportunities across the U.S. In addition, the two companies plan to explore opportunities to co-develop cloud-based applications for customers in the retail, healthcare and financial services industries.
  • Q3 financial results showed that Workday’s:
    • revenues increased 20% year-over-year,
    • non-GAAP operating income rose 23.9% from the same period last year,
    • non-GAAP EPS was up 27.9% from the prior-year quarter topping the Street’s EPS estimates by 27.9%.
  • The majority of analysts, as tracked by S&P Global Market Intelligence, are bullish on Workday forecasting EPS to grow 26% annually over the next three-to-five years, or nearly twice the anticipated growth rate of the overall IT sector.
  • Google is UP +61.9% YTD while Workday is UP +14.4% YTD.

In summary,

  • The FAANG stocks are UP +25.5% YTD, while their ancillary “partners”, as outlined above, are UP +30.0% YTD.
  • Owning each of the 5 ancillary partner stocks discussed above would only cost $737.67, in total, today, compared to $7,476.69 for the FAANG stocks, allowing an investor to get the same exposure to the category for 90% less dollars and, as such, the ability to build a more diversified portfolio.

Going forward, I will be tracking the performance of the FAANG stocks and their ancillary partners on a twice-monthly basis so stay tuned.