On July 25 of this year, Facebook Inc (NASDAQ:FB) issued an after-hours trading update that wiped off around a fifth of its market value the following day.
Since then, things have been nervy for the FAANGs – well, most of them.
The so-called FAANGs consist of Facebook, Apple, Amazon, Netflix and Google, which unhelpfully changed its name to Alphabet, so we should be talking about FAAANs. One suspects Netflix was only included in the group for the purposes of making a more appealing name.
READ US$100bn wiped from Facebook’s market value amid concerns over future growth
Last night, Amazon.com Inc (NASDAQ:AMZN) had its Facebook face-plant moment, missing expectations on the top-line and earnings. In pre-market trading, the shares were off 8.7% (so not as dramatic a face-plant as Facebook’s in July).
Company
Price on July 25
Price now
% change
Market Cap
Price/earnings ratio
Dividend yield
US$217.50
US$151
-30.6
US$435bn
23.33
0
Apple
US$195
US$220
+12.8
US$1,060bn
19.94
1.33%
Amazon
US$1,864
US$1,628
-12.7
US$869bn
141.4
0%
Netflix
US$363
US$313
-13.8
US$136bn
111.7
0%
Google*
US$1,276
US$1,104
-13.5
US$765bn
47.8
0%
* More accurately, Alphabet, the company that owns Google
As can be seen from the above table, out of these five normally uber-sexy stocks, only Apple has seen its share price rise since Facebook spooked the market with below-par growth in user numbers and a warning in a conference call with analysts that investments in privacy and security would have a “significant impact on profitability” this year.
READ Facebook fined £500k by UK watchdog over Cambridge Analytica data breach
Facebook’s chief financial officer, David Wehner, cautioned: “Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4.”
The herd mentality
On the face of it, there’s no reason why a warning from Facebook should have soured sentiment for the other FAANGs, as aside from the fact they are all technology companies and very clever with their tax returns, there is not a lot that unites them.
From an investment perspective, however, the group are like those football players on a game of table football (known as fussball in the US, I believe) that move from side-to-side and swing backwards and forwards in unison.
It's moving along nicely here at the #btclive #StevenageFC lunch. With speed cage, table football and Boro the bear! pic.twitter.com/ZJhEg6laub
— btc Stevenage (@btcstevenage) October 26, 2018
This is because some clever chap lumped them together and called them FAANGs and investors piled into them, often via exchange-traded funds.
The more the shares soared in value, the more investors bought into them, buying into the premise of plentiful “jam tomorrow” (“jelly tomorrow”, probably, in the US) while ignoring conventional investment measures, such as price/earnings ratios and dividend yields. The more they soared in value, the more index-tracking unit trusts (mutual funds) were obliged to buy them and so we got into a feedback loop.
The moment the majority of investors start paying attention to fundamentals, or twig to the threats facing the companies, then the fall could be as rapid as it was for the companies that fell when the dot.com.
What are the threats facing the FAANGs?
The main threats vary from company to company but fall, perhaps, into three categories.
First, there is a general feeling that the FAANGs, with the possible exception of the runt of the litter, Netflix, have got a bit too big for their boots.
Governments are cheesed off at the corporate structures of many of the tech giants that enables them to minimise the amount of tax they pay.
The response from those companies where this accusation is levelled is always, “we have not broken any laws”.
That is true and as a rejoinder, it probably plays better than “let them eat cake” but as soon as governments figure out a way of closing the tax loopholes and making the tech giants pay their share, expect the companies’ share prices to come off the boil, rapidly.
From the perspective of the tax-man, the trouble is that the tech companies are accomplished at finding new loopholes as fast as the old ones are closed.
At the same time, the companies are able to spend impressive amounts of money – the money is probably tax-deductible – lobbying law-makers and making a big noise about how they contribute to jobs creation in the economy.
In a world where a local government authority is prepared to pay hundreds of millions of dollars to a tech giant to switch its headquarters from one state to another, the jobs creation argument is obviously a strong one.
Governments are either in thrall to the tech giants or in awe of them but next week, the UK’s finance minister, Philip Hammond, will unveil his budget and there’s talk of him introducing an “Amazon tax” to level the playing field a bit back towards the bricks & mortar.
It’s probably just talk, mainly because no government wants to operate alone on a big issue such as this and getting the world’s finance ministers to all agree on a “hit the FAANGs” policy is about as likely as herding a thousand cats into a swimming pool.
Governments and indeed the general public have also got fed up with tech companies playing fast and loose with data privacy.
If the governments can’t tax ‘em, they may go down the route of fining them (massively) for any misdemeanours.
When IBM and Microsoft were kings of the tech world
The second major threat is the fast pace of technological change.
To justify their stratospheric stock ratings, the FAANGs have to keep growing like billy-o and they have to do while fighting off competition and stayign abreast of technological and social trends.
Some, such as Apple, are already seeing demand for their main product – in Apple’s case, the iPhone – level off.
Facebook is finding that its social media platform is now more the playground of “silver surfers” than hip young men with backwoodsman’s bears and on-trend women with interesting body piercings and tattoos; the younger crowd has moved on to other platforms.
Alphabet, an advertising company masquerading as a search engine company, could find that Generation X prefers to get all of its news and information, including search queries, from social media platforms (Alphabet quietly shuttered its own “Facebook killer”, Google+ a while ago). More to the point, they might get all of their online adverts from those sources, too.
Meanwhile, Netflix has to worry about the other FAANGs muscling in and eating its lunch.
In the main, the FAANGs have all diversified to avoid going out of fashion and of the five, Amazon is probably the one that has done so most successfully.
There seems no end to the products Amazon wants to sell through its online platform – even groceries are on the menu now – while its cloud platform is also a big player in its field.
Amazon also has some big markets still left to conquer, such as India; on the other hand, it is the only FAANG with a price/earnings ratio in triple figures so one could argue that its growth potential is already baked into the share price.
China crisis
While the US has its FAANGs, China has its BATs: Baidu, Alibaba and Tencent.
For Amazon, read Alibaba. For Google, read Baidu. For everything else (social networking, e-commerce, smartphones), read Tencent.
The BATS are dominant in China, which has the largest population in the world (and then some), and that provides a fantastic base from which to expand globally … unless, of course, foreign governments get antsy about Chinese companies, as President Trump did when he blocked the proposed acquisition of a US computer chip-maker by a China-backed consortium.
Apple and Amazon have jumped through hoops to gain access to the enormous Chinese market whereas the other FAANG members have more or less retreated from the market.
They will continue to do battle with the BATs across the globe and no one really knows who will win. Perhaps they will all live together in peace and harmony while singing Kumbaya around the camp fire … but I would not bet on it.