US market returns in Q2 were once again dominated by the top 5 market cap stocks following blockbuster earnings reports in April. In 2020, AAPL, MSFT, AMZN, GOOGL and FB (FAAMG) combined to represent nearly 25% of the S&P 500 on a cap-weighted basis, but this concentration diminished over several quarters prior to Q2 as investor preference shifted towards reopening themes. Following their recent outperformance last quarter, concentration of these top 5 stocks has reached 22.4% of the S&P 500.
The intrinsic value characteristics of the FAAMG stocks dominate many of the themes reviewed in this quarter’s write-up, including the improved valuation characteristics of intrinsic value weighted indices, as well as growing firms with high profits. 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 intrinsic value characteristics indicate that these stocks continue to offer material upside potential despite their collective outperformance over the last several years.
While many growth-oriented peers are struggling to deliver economic profitability, these five stocks generate significant cash flow in excess of their cost of capital. They also have numerous positive NPV projects to consider, creating wealth compounding benefits for shareholders. We can explore the intrinsic value characteristics of these firms by solving for implied expectations and comparing to consensus forecasts. We can also calculate the value contribution of each stock in the S&P 500, using various value measures (including market value and intrinsic value, while also deconstructing intrinsic value into its common stock and excess intrinsic value components).
Top 5 Market Cap Stocks: Intrinsic Value Contribution & Consensus Forecasts
FAAMG stocks comprise 18.9% 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. This intrinsic value contribution increases to 26.8% when we further include consensus forecasts through 2024. FAAMG stocks also contribute 31.8% of the S&P 500’s intrinsic value (+3) not already reported as common stock on each firm’s balance sheet.
2024 intrinsic value forecasts are driven by massive EPS and revenue growth expectations, especially AMZN, GOOGL, and FB, which are each forecasted 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 5.9% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 4.2% of the overall S&P 500’s intrinsic value; this increases to 5.5% using consensus forecasts through 2024.
The common stock of AAPL only accounts for 0.8% of the S&P 500’s book equity, but AAPL contributes 6.7% of the Excess Intrinsic Value not reported on each firm’s balance sheet (including consensus forecasts through 2024).
The implied sales growth for AAPL beyond 2022 is 3.07%, which indicates priced-in expectations lag 2022 consensus forecasts by 1.5%.
Microsoft Corp (MSFT) Intrinsic Value Contribution & Implied Expectations
MSFT’s market cap comprises 5.3% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 3.5% of the overall S&P 500’s intrinsic value; this increases to 4.3% using consensus forecasts through 2024.
The common stock of MSFT only accounts for 1.4% of the S&P 500’s book equity, but MSFT contributes 5.0% of the Excess Intrinsic Value not reported on each firm’s balance sheet (including consensus forecasts through 2024).
The implied sales growth for MSFT beyond 2022 is 17.19%, which indicates priced-in expectations exceed 2022 consensus forecasts by 5.8%.
Amazon.com Inc (AMZN) Intrinsic Value Contribution & Implied Expectations
AMZN’s market cap comprises 4.5% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 2.5% of the overall S&P 500’s intrinsic value; this increases to 6.1% using consensus forecasts through 2024.
The common stock of AMZN only accounts for 1.1% of the S&P 500’s book equity, but AMZN contributes 7.4% of the Excess Intrinsic Value not reported on each firm’s balance sheet (including consensus forecasts through 2024).
The implied sales growth for AMZN beyond 2022 is 11.50%, which indicates priced-in expectations lag 2022 consensus forecasts by 6.4%.
Alphabet Inc. (GOOGL) Intrinsic Value Contribution & Implied Expectations
GOOGL’s market cap comprises 4.2% of the overall S&P 500 market cap. Their intrinsic value based on LFY data contributes 4.2% of the overall S&P 500’s intrinsic value; this increases to 5.8% using consensus forecasts through 2024.
The common stock of GOOGL only accounts for 2.7% of the S&P 500’s book equity, but GOOGL contributes 6.6% of the Excess Intrinsic Value not reported on each firm’s balance sheet (including consensus forecasts through 2024).
The implied sales growth for GOOGL beyond 2022 is 1.43%, which indicates that priced-in expectations lag 2022 consensus forecasts by 15.3%.
Facebook Inc. (FB) Intrinsic Value Contribution & Implied Expectations
FB’s market cap comprises 2.6% 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; this increases to 5.1% using consensus forecasts through 2024.
The common stock of FB only accounts for 1.6% of the S&P 500’s book equity, but FB contributes 6.1% of the Excess Intrinsic Value not reported on each firm’s balance sheet (including consensus forecasts through 2024).
The implied sales growth for FB beyond 2022 is -7.26%, which indicates that priced-in expectations lag 2022 consensus forecasts by 27.2%.
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Author
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Derek Bergen, CFA – Applied Finance Partner Joined Applied Finance, 2005. Portfolio Manager and Quantitative Research Analyst. B.S. University of Wisconsin-Madison.
