Banish Fear (of) Markets – Issue 18/2022 – 10 November 2022
What a run FAANGS (Facebook, Amazon, Apple, Netflix, Google) has had. If you had invested US$1,000 in them in Jan 2012, it would have been worth over US$14,000 at the end of 2021, 14 times your original investment.
But that glorious run has ended. As of today, the group is down 59% from its peak in 2021. Meta, as Facebook is now calling itself, alone has lost 75% from its peak.
So what’s the future of FAANGs? (Note, Microsoft has recently joined this illustrious group after Satya Nadella reoriented Microsoft towards cloud computing and SaaS)
We need to distinguish between cyclical economic pressures and structural issues. Cyclical pressures are temporary, but structural issues are more permanent.
A recession, a reduction in consumer spending, or a downturn in the advertising market, is cyclical.
A bet on a new technology which requires new consumer behaviour, or the emergence of strong competitors, is structural.
When assessing the prospects of the tech companies, we need to see if the pressures they are facing are temporary cyclical ones or more permanent structural ones.
Let’s put the FAANG group to the test.
Temporary Cyclical Issues
Slowdown in advertising – a temporary phenomenon, affects Meta and Google primarily, as their core business model is advertising.
Slowdown in consumer demand – temporary, affects sale of iPhones (Apple) and consumer items (Amazon) and expensive subscriptions (Netflix).
Slowdown in business demand, including cloud services affects Microsoft, Amazon and Google who are the main cloud service providers to businesses.
Structural issues
Big bet on a new, untested platform – structural. This is what Facebook/Meta is doing with its investments in the Metaverse. Results so far? After spending x billion, Mark Zuckerberg has only 200,000 monthly active users on it. (Gee, that’s lower than one fifth of the monthly active users of Malaysia’s Newswav, a news aggregator company I invested in).
Emergence of strong competitors impacting your core business model – structural. This is Netflix’s situation, the entry of Disney, HBO, Apple and Amazon into the subscription-based video streaming business has slowed down the growth of its subscribers. So it’s developing an additional advertising-based business model. Unlike Meta’s bet on the Metaverse, this is not a big bet, the investment is probably on a marginal cost basis (ironically, their technology provider is Microsoft).
So how would these leading tech companies rank in terms of investability?
Daniel Ives of Wedbush Securities offered this ranking when BFM 89.9 interviewed him last week:
- Apple
- Microsoft
- Amazon
- Meta
(Netflix was not discussed)
But Daniel’s position on Meta was blunt: “If I was on the Meta plane with Zuckerberg flying it, I’d look for the parachute to jump out”. You can hear his blunt assessment here.
Understandable. There’s a phrase in tech called the “bleeding edge” (instead of the leading edge). This is where you burn lots of money at the frontiers of development of a particular technology.
This is where Meta is. Not only is the technology not ready, you need to convince a whole bunch of consumers to buy expensive VR headsets to experience the metaverse.
I still own Facebook stock which is still above water (I bought around the Facebook IPO) . My next move will be to switch a substantial portion of it to other tech stocks that will benefit from a positive change in the economic cycle.
Disclaimer
This column is to help people who fear investing to experience the investment rationale of a long term investor in global stock markets. It is for informational purposes only and not intended as advice or recommendation to buy any stocks. Please consult a licensed professional adviser before making any investment decisions.
Malek Ali, Founder BFM 89.9 – The Business Station, CFP Professional
