Facebook’s fall: where to now for the Faangs?
Vulnerabilities appear in Facebook, Apple, Netflix and Google
● Buying the collection of high-growth US technology behemoths known as the Faangs has been a simple route to outsized investment returns in recent years.
Facebook, Amazon, Apple, Netflix and Google’s parent company, Alphabet — collectively known by the acronym Faangs — have shaken off occasional public relations problems and growth scares to hit record high after record high. But the latest round of earnings reports for the group has made this winning trade look more complex.
“It is a wake-up call,” said Ari Shrage, CEO of Aliya Capital, which advises funds on tech investments. “You cannot blindly buy these stocks.”
Contrasting fortunes in the second quarter have served as a reminder that, while often bunched together by investors, they operate different businesses. That raises questions whether their performance may diverge in the future. Certainly in the short term the shares can do wildly different things in response to individual pressures.
Facebook lost more than $120-billion (about R1.6-trillion) in value on Thursday by warning of slowing user and advertising sales growth. Earlier this year it lost almost as much market capitalisation over a few days when concerns emerged over its ability to protect users’ privacy.
Shares in Netflix fell last week when its quarterly earnings revealed disappointing viewer growth. By contrast, Amazon beat Wall Street profit estimates by a wide margin and traded up after hours on Thursday, while Alphabet this week shrugged off a record fine from the European Union as investors focused on growth and profits. Apple reports earnings on Tuesday.
“On the whole, [Faangs] may be classified in the same economic sector but they are very different businesses, subject to different risks and executing at different levels,” said David Donabedian, chief investment officer at CIBC Private Wealth Management.
“Why would you expect them all to behave the same way at the same time?”
Tech stocks have seemed to promise relentless growth, based on the overarching trend of a digital revolution across society, making them different from other stocks whose growth depends on the ebbs and flows of the underlying economy, and in the US, the political vagaries in Washington that cause investors to fret.
As for the Faangs, the very biggest of the big tech stocks, “they have huge valuations for a reason”, said Nicholas Colas, cofounder of DataTrek. “A small number of people have built huge franchises.”
With the exception of Netflix, the Faangs have market values topping $500-billion, and Amazon, Apple and Alphabet are approaching the $1-trillion mark.
“People are captivated by them because they are all Silicon Valley companies that are all huge and still growing fast, and that doesn’t come together often,” said George Pearkes, a strategist at Bespoke Investment Group. “Even with the deceleration, Facebook’s growth is still better than almost any other major company.”
For Steve Chiavarone, a portfolio manager at Federated Investors, the Faangs dominate the main ways consumers use the internet— Google for maps, search and video, Amazon for commerce, Apple for mobile devices, Netflix for entertainment and Facebook for social media.
“They are powerful in the verticals of the internet, but they are different verticals,” he said. “While they are all benefiting from what we call the digital revolution, they are different and the challenges are different.”
Many fund managers have long worried that the rush into the big tech companies of the US and China has become a “crowded trade”, in other words overextended and vulnerable to a sharp reversal.
More than $20-billion has flowed into dedicated technology funds this year, smashing past the full-year, record-breaking inflows of 2017. The rise of passive investing has increased correlations among Faangs in recent years, as it has for stocks in general. Meanwhile, so-called momentum investing, where traders and investors buy assets that are rising, has also fuelled the Faangs trade.
The NYSE Fang+ index, which includes the Faangs and other companies that have enjoyed explosive growth since the turn of the millennium, has beaten the broader US stock market in recent years. It includes Tesla, Nvidia and China’s Baidu and Alibaba. It has risen nearly 140% since the start of 2015 versus close to 40% for the S&P 500.
Many actively managed equity funds have piled in enthusiastically. For example, Fidelity’s $129-billion Contrafund, led by famed stockpicker William Danoff, held a $9.3-billion stake in Facebook at the end of May, according to filings, while Capital Group’s $198-billion Growth Fund of America held a $7-billion stake at the end of June.
Leading up to Wednesday’s earnings, 44 out of the 52 analysts that track Facebook rated its stock as a “buy”, while only two were neutral and two rated its shares as a “sell”. On average, they had a 12-month price target of $229.53.
After the earnings, analysts had pruned the average price target to $209.50, a downgrade but still well above their beaten-up level of $176.26 at the close of Thursday’s brutal trading day. “Valuation-wise it is interesting now,” said Marco Pirondini, head of US equities at Amundi Pioneer Asset Management. “There are still some clouds on the horizon” but Facebook and many of its other Big Tech peers remain enviably profitable and still enjoy robust growth outlooks.
“Technology stocks have performed very well and need a correction,” Pirondini said, “but these are still real winners with strong business models.”