The Bust and Boom of US Tech-Stocks: A Reverse-engineered Discounted Cash Flow Approach to the FAANG Companies

Even Nødland & Henrik Laurans Hoem

Student thesis: Master thesis

Abstract

The study considers the five largest American Internet companies behind the acronym FAANG, i.e. Facebook, Amazon, Apple, Netflix, and Google (Alphabet), and sets out to assess their current valuation in the American equity market. Having seen exceptional growth in their stock prices to undergo an incredible journey on the New York Stock Exchange (NYSE) over the past five years, more and more observers are questioning the valuations of the Internet juggernauts. Increasingly, questions are being raised as to whether the stocks might in fact be inflated by irrational exuberance, and not reflect the potential of the businesses. In a reverse-engineered discounted cash flow model, the study backs out the growth rates implied by the FAANGs stock prices as of January 31st, 2018, with the purpose to assess the likelihood that they will deliver on the market expectations for future growth. By backing out the growth rates implied by the current stock prices, the model enables the study to circumvent one of the biggest sources of error in the DCF model, i.e. the forecasting of future cash flows. The model reveals that Facebook and Amazon have the highest implied growth rates amongst the FAANG companies as of January 31st, 2018, and hence they are selected for further investigation. In order to assess the likelihood that Facebook and Amazon will deliver on the market expectations, a thorough strategic analysis of the two businesses is implemented. By determining the strategic value drivers that influence the future success of these Internet giants, the study is able to conclude in general terms whether the implied growth rates are within reach. Although both Facebook and Amazon are found to be in a favourable strategic position, the study finds evidence only to support the notion that Facebook is likely to deliver on the market expectations. Amazon is expected to grow considerably in the future, however, the share magnitude of the implied growth rate makes it unattainable. In conclusion, the study provides an inventive approach to assessing the valuation of firms in fastchanging industries with considerable uncertainty associated with future cash flows. As of January 31st, 2018, in the framework stipulated above, Amazon showed evidence of being overpriced in terms of expected future growth, while the Facebook stock evinced signs of being underpriced.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages114
SupervisorsOle Risager