US market returns in Q3 were once again led by the 5 largest stocks, both in the gains achieved through early September and in the ensuing sell-off. By the end of Q3, AAPL, MSFT, GOOGL, AMZN and FB (FAAMG) outperformed other market cap tiers and combined to represent 22.8% of the S&P 500 on a cap-weighted basis.
The intrinsic value characteristics of the FAAMG stocks have improved dramatically since the start of 2021 due to full fiscal year financial statement updates in early 2021 (for GOOGL, AMZN & FB) and improving consensus forecasts over the previous 12 weeks (for AAPL, MSFT, GOOGL & FB). At the end of Q3, their average intrinsic value upside (including consensus forecasts through 2024) was 34.6%.
Given the impact that these stocks have on cap-weighted benchmarks, we want to continue to review their valuation prospects on a quarterly basis. Many market participants presume that these stocks are due to underperform based on their large market caps, expensive GAAP accounting-based price multiples and high rates of investment, but we can further identify each firm’s investment prospects and potential impact on equity benchmarks by studying each stock’s intrinsic value contribution and implied expectations compared to consensus forecasts in advance of earnings updates in late October/early November.
Top 5 Market Cap Stocks: Intrinsic Value Contribution & Consensus Forecasts
FAAMG stocks comprise 20.1% of the overall S&P 500’s intrinsic value when we assume the immediate decay of EMs and organic growth based on financial statement data reported in the most recent fiscal year. FAAMG stocks contribute 24.9% of the S&P 500’s intrinsic value not already reported as common stock on each firm’s balance sheet, while they only contribute 7.9% of the S&P 500’s overall common stock reported in book equity.
Further improvements to intrinsic value forecasts are driven by massive EPS and revenue growth expectations, especially for GOOGL, AMZN and FB, which are expected to see EPS and revenue double between their most recent fiscal year and 2024.
Apple Inc (AAPL) Intrinsic Value Contribution & Implied Expectations
AAPL’s market cap comprises 6.0% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 4.1% of the overall S&P 500’s intrinsic value but their common stock reported in book equity contributes only 0.8% of the S&P 500’s overall book value. AAPL contributes 5.4% of the Excess Intrinsic Value not reported on each firm’s balance sheet.
The implied sales growth for AAPL from 2022 forward is 2.33%, which indicates priced-in expectations fall 2.21% below 2022 consensus forecasts of 4.54%. (Mild upside potential)
Microsoft Corp (MSFT) Intrinsic Value Contribution & Implied Expectations
MSFT’s market cap comprises 5.5% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 5.1% of the overall S&P 500’s intrinsic value but their common stock reported in book equity contributes only 1.7% of the S&P 500’s overall book value. MSFT contributes 6.4% of the Excess Intrinsic Value not reported on each firm’s balance sheet.
The implied sales growth for MSFT from 2022 forward is 16.65%, which indicates priced-in expectations fall 3.54% above 2022 consensus forecasts of 13.11%. (Mild downside potential)
Alphabet Inc. (GOOGL) Intrinsic Value Contribution & Implied Expectations
GOOGL’s market cap comprises 4.6% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 4.1% of the overall S&P 500’s intrinsic value but their common stock reported in book equity contributes only 2.7% of the S&P 500’s overall book value. GOOGL contributes 4.6% of the Excess Intrinsic Value not reported on each firm’s balance sheet.
The implied sales growth for GOOGL from 2022 forward is 2.19%, which indicates priced-in expectations fall 14.61% below 2022 consensus forecasts of 16.80%. (Significant upside potential)
Amazon.com Inc (AMZN) Intrinsic Value Contribution & Implied Expectations
AMZN’s market cap comprises 4.3% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 2.4% of the overall S&P 500’s intrinsic value but their common stock reported in book equity contributes only 1.1% of the S&P 500’s overall book value. AMZN contributes 2.9% of the Excess Intrinsic Value not reported on each firm’s balance sheet.
The implied sales growth for AMZN from 2022 forward is 13.99%, which indicates priced-in expectations fall 4.41% below 2022 consensus forecasts of 18.40%. (Mild upside potential)
Facebook Inc. (FB) Intrinsic Value Contribution & Implied Expectations
FB’s market cap comprises 2.5% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 4.4% of the overall S&P 500’s intrinsic value but their common stock reported in book equity contributes only 1.6% of the S&P 500’s overall book value. FB contributes 5.5% of the Excess Intrinsic Value not reported on each firm’s balance sheet.
The implied sales growth for FB from 2022 forward is -9.52%, which indicates priced-in expectations fall 29.74% below 2022 consensus forecasts of 20.22%. (Significant upside potential)
For updates on our investment strategies and more articles like this, join our Valuation Edge™ newsletter.
Author
-
Derek Bergen, CFA – Applied Finance Partner Joined Applied Finance, 2005. Portfolio Manager and Quantitative Research Analyst. B.S. University of Wisconsin-Madison.
