Investment Matters

Are the FANGs losing their bite?

The term FANG was coined to refer to the tech stocks of Facebook, Amazon, Netflix and Google (now called Alphabet).  Adding Apple and Microsoft more completely represents the big name tech company list.

This week’s Investment Matters looks at some recent history, some more recent developments, and some general thoughts regarding these stocks.

But first, a new addition?

As of this week, should FANG be updated to FANGS? - with the highly publicised listing of music streaming service Spotify on the NY Stock Exchange (NYSE). 

Probably not.  Although it was a quite spectacular debut for a company not earning a profit, its ~US$30billion market cap (which varies quite a bit as the share price bounces around, as it tries to establish what valuation should be attributed to it) actually makes it a minnow compared to big tech.

The smallest big tech name is Netflix, with a market cap of US$125.4 billion, followed by Facebook at ~US$450.6 billion and the others in the realm of US$700 billion and up.

[Figures are at close of trade 4-Apr-18.]

A stellar rise

2017 saw a spectacular rise in the share prices of the big tech names, as shown in the following graph.

 

Source: IRESS, Yahoo! Finance, First Samuel

2018 brings the downfall

2018 has seen share price pressure mounting on the big tech companies, especially during March (not so much on Microsoft, though).  Not surprisingly, given the apparent privacy breaches associated with Cambridge Analytica, Facebook has underperformed its peers as well as the broader market (as measured by the S&P500 index).

 

Source: IRESS, Yahoo! Finance, First Samuel

But some context

 

Source: IRESS, Yahoo! Finance, First Samuel

As shown in the graph above, even with the recent tumbles, the share prices of the big techs are still well above where they were at the start of 2017, and have comfortably outperformed the broad US market (as measured by the S&P500 index).

Some thoughts

We are cautious investors when it comes to looking at technology / trends / businesses of the future.  Overlooking valuations and fundamentals is something we try hard not to do.

Companies with more stretched valuations are usually the ones to fall further in times of market pressure, or when a company-specific event hits.

And then there are the business risks each is facing.  In the case of Facebook, the real risk is the impact of privacy regulations (recently enacted in Europe, and likely to be enacted in the US and elsewhere following the Cambridge Analytica developments), and regulations regarding political manipulation.  For Amazon, it is risk associated with political interference in the business (informal from Trump re USPost costs).

The tech companies have actually performed quite well even allowing for the recent ruckus – if you look at a time frame of greater than two months!  We don’t pretend we can predict the future - we can't!  But it will be very interesting to see what the future brings to companies such as Facebook and Amazon - even after the recent falls they are trading at share prices that assume very considerable revenue and earnings growth.

Reversion to fair value can take time; it can even be years before it happens.  But maybe big tech is starting to head in that direction.