Faangs’ growing pains should not cause alarm

Pressures are mounting, but big tech business models remain sound.

  • By The FT View,
  • Financial Times
  • Investing Strategies
  • Investing in Bonds
  • Investing in Sectors
  • Market Analysis
  • Markets
  • Technology
  • Stocks
  • Investing Strategies
  • Investing in Bonds
  • Investing in Sectors
  • Market Analysis
  • Markets
  • Technology
  • Stocks
  • Investing Strategies
  • Investing in Bonds
  • Investing in Sectors
  • Market Analysis
  • Markets
  • Technology
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

The Faangs are dead; long live the Faangs. The latest earnings season from the US technology kings — Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet’s Google (GOOGL) — has been an uncharacteristic rollercoaster ride. Varying outlooks have been met by sharply contrasting market reactions. Share price falls after disappointments from Netflix, Facebook and the smaller Twitter (TWTR), have left the broader Fang+ index of technology companies down almost 10 per cent from its June high, despite strong results from Apple.

For the wider market and economy, this is a big deal. The Faangs account for about one-eighth of the S&P 500 index’s (.SPX) total value but, says Bespoke Investment, they have provided half the market’s growth this year. Buying into them has been the most popular trade among money managers for months — forcing passive funds to do likewise as their weighting in the index has increased. Some funds are rueing tech punts they chose or had to take.

This reliance on one narrow segment for so much of the market’s growth is unhealthy; tech’s share of the wider index is now the highest since the dotcom boom. But that era featured too many flimsy companies with no profits reaching wildly inflated valuations based on hope and hot air. Today’s tech leaders have viable models and real earnings. Even Netflix, by far the smallest Faang, made net income of $1bn from revenues approaching $14bn in the past four quarters. This earnings round has, however, highlighted important differences in business models. The market needs to differentiate more between companies viewed for too long as a uniform group. Coupled with a potential rotation from growth into value stocks, that could mean more volatility. Investors should draw three lessons from recent weeks.

First, the Faangs are unusual in becoming corporate titans while maintaining growth rates more akin to start-ups. This headlong expansion cannot be maintained forever. But managing down expectations is tricky. High-growth companies get punished when they disappoint — and even small downgrades to future growth at such big companies can erase a lot of value.

Second, concerns that core businesses are maturing are justified. Google still depends too much on search-linked advertising (70 per cent of revenues) and Apple on iPhones (56 per cent this quarter). Competition between tech groups may squeeze margins as they seek growth in part by moving into each other’s markets.

But on current evidence the mature businesses remain strong, while the latest tech leaders are doing better at diversifying and reinventing themselves than some predecessors did. Apple’s services division, including its App Store and music streaming, now accounts for a fifth of its business. Cloud computing is opening new growth for Amazon and Microsoft (MSFT).

Thirdly, regulatory risks are increasing, and difficult to price — but were not directly responsible for recent earnings disappointments. Google has largely shrugged off its €4.3bn antitrust fine from the EU. Facebook blamed its disappointing outlook not on the scandal over its data leak to Cambridge Analytica but on introduction of a new advertising format and giving users more control over privacy.

Social media groups, battling to maintain user growth and engagement amid concerns over data security and “fake news”, may face bigger issues than other technology rivals. Yet while the tech correction may have a little further to run, the biggest takeaway from the Faangs’ latest results is that their businesses remain, fundamentally, in pretty good shape.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© The Financial Times Limited 2018. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.