FAANGS is not the sharpest of categories
When Apple reports its third-quarter results on Tuesday, the iphone maker will wrap up the “FAANG” results season. The earnings announcements from Facebook, Apple, Amazon, Netflix and Google owner Alphabet might be expected to have shone some collective light on the outlook for the high-flying technology sector. In reality, all we will have learned is how very different these companies are.
Apple’s numbers are forecast to be good. Earnings should be 37pc higher than a year ago, the best quarterly increase since 2015. During the three months to June, Apple is expected to have sold just over 42m iphones.
With just one of the five FAANGS to report, the jury is out on whether this has been a good or bad results season.
Amazon delivered a $2.5bn (£1.9bn) quarterly profit for the first time. Likewise, Alphabet shrugged off a huge fine from the EU to report strong earnings growth.
For the other two members of this elite group, however, it was a different and disappointing story. Facebook delivered 42pc revenue growth and 2.5bn monthly users of its various platforms, but suffered the biggest ever daily fall in a single company’s market value. It slumped by 24pc, over $140bn, after warning that revenue growth and margins had peaked. Netflix, meanwhile, narrowly missed subscriber growth estimates and paid the price with a 14pc share price fall.
Clearly, this group of companies do have some things in common. All are leading firms exploiting the various ways in which we all use the internet.
But setting aside the fact that these are all technology-driven businesses, they are as notable for their differences as their similarities. The share price collapses for Facebook and Netflix reflected shortfalls in different key measures of success.
Investors were prepared to put up with regulatory and reputational threats to Facebook but not the suggestion that it might be reaching the limits of how much advertising it can put in front of a maturing user base. For Netflix, the worry is subscriber growth and the exorbitant cost of producing compelling content.
So apart from the fact that all five companies are big, fast-growing and from the same place, why do we insist on clumping them together? The reason is to do with the need for humans to create narratives that explain the world.
Investors have been here before. The biggest appeal of the FAANGS is that they offer the prospect of sustainable growth in a sluggish post-crisis world. Exactly the same positive story underpinned the creation of an equally arbitrary grouping of shares in the Seventies, the “Nifty Fifty”. Nearly 50 years ago, the global economy was in a mess as the post-war boom morphed into an inflationary spiral. The easy narrative to cope with that environment was that a small handful of dominant brands could deliver growth through thick and thin. The beauty of Mcdonalds, Coca-cola, Johnson & Johnson, Polaroid and IBM was that it didn’t matter what price you paid, the growth in profits would bail you out in time. That was the theory.
The reality was that the Nifty Fifty was no more of a meaningful grouping than the FAANGS are today. Apart from the fact that you really can overpay for growth, many of the companies were nothing like as impregnable as investors hoped.
To remind myself of a more recent example of our vulnerability to false narratives, I looked again at a slim volume that Goldman Sachs’s then chief economist Jim O’neill penned 12 years ago. The World and the BRICS Dream makes a compelling case for investing in four emerging markets: Brazil, Russia, India and China.
Like the FAANGS and the Nifty Fifty, the BRICS had, and have, some things in common but even more than the other two groupings, the differences are blindingly obvious.
Two are big producers of natural resources, two are consumers. Politically and economically, they could not be more unalike.
Does all this matter? Unfortunately, it does because the rise of passive investing and benchmark hugging, together with the FAANGS now being worth more in total than the giants making up the FTSE 100, means we are all more exposed than we know to the fortunes of just five businesses.
The best managers, like Rathbones’ James Thomson, who holds Amazon stock but sold his entire holding in Facebook a few weeks ago, disregard unhelpful catch-alls and assess each company on its individual merits.
‘The FAANGS are as notable for their differences as their similarities’
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets @tomstevenson63