Company results announcements hunt in packs. Earnings season always kicks off with the big US banks. Then, it’s tech’s moment in the spotlight. We recently heard from Meta (Facebook), Alphabet (Google), Amazon, Apple and Microsoft. Throw in the recent catastrophic miss from Netflix and you’ve completed the set - the group of companies that investors lazily known as the FAANGs.
I say lazy because it’s increasingly not a meaningful grouping. It’s not just the name changes, and the absence of an M, that mean the name is past its sell-by date. The group is an idle shorthand because it implies a homogeneity among the companies that doesn’t stand up to scrutiny. These are businesses that are only superficially comparable. They are driven by very different commercial influences and investors may not be served well by looking at them through the same lens.
I am reminded of an earlier marketing-inspired acronym that made less sense than claimed. When Goldman Sachs came up with the BRICs group of emerging markets twenty or so years ago, there seemed a kind of logic to the comparison. Here were four big developing countries with apparently prosperous futures and we were easily encouraged to view them as one collective opportunity.
The reality was always rather different from the sales pitch. Two of the four were and are commodity exporters while two are big importers of natural resources. Two were, nominally at least, democracies while two were clearly not. One was the workshop of the world, the others were not globally competitive manufacturers. None of them have turned out quite how investors expected two decades ago although, to be fair to Goldman, their stock markets had all done at least as well as the S&P 500 until a couple of months ago - albeit with a great deal more volatility.
So, back to the tech stocks. The recent results announcements have shown that the differences between the FAANGS+M are at least as great as the similarities. Sure, they are all big, more or less technology-focused businesses (but which company is not these days), and until recently they were all high-performing stock market investments. As both the trading and investment environment has deteriorated, however, it has become less helpful to group them together.
The differences have been highlighted by the very different share price performances of the six companies. Over the past year, three have made money for investors and three have not. Both Alphabet and Microsoft have delivered single digit returns over 12 months, a far cry from their recent outperformance but not a disaster. Apple has been the pick of the crop, returning 20pc. Amazon is about 12pc under water while both Meta and Netflix have been disastrous investments, down 40pc and 60pc respectively.
The wide variation in performance should hardly be surprising when you consider how very different are the companies’ business models, target markets and vulnerabilities to today’s challenging environment.
Some of the group are what might loosely be called platforms, beneficiaries of the network effects in which growth in the number of users brings disproportionate advantage. Meta is the clearest example of this but Alphabet too. The more people that use Facebook, Instagram or Google, the greater the opportunity cost of not being one of them. But, despite the attempt by Apple to trap its users in a gilded cage of compatibility only with other Apple users and products, this is not true of the others.
A second key difference between the six is the extent to which they are protected by the barriers to entry that Warren Buffett described as a moat. The most notable exception to this rule is clearly Netflix, which has revealed itself to be more of a disposable commodity than many investors hoped or expected until very recently. Like Hoover, it may have come to be the poster-child of its category, but it too has many competitors. And unlike a vacuum cleaner, its product is not as much a must-have as we thought. A forecast two million ex-subscribers in the second quarter will be testament to that.
Another difference is the companies’ varying vulnerability to the world’s gummed up supply chains, especially in light of China’s apparently doomed bid to defeat rather than live with Covid. Apple and Microsoft, as hardware manufacturers are obviously exposed to the world’s computer chip shortage. It is neither here nor there for Meta, Alphabet and Amazon. In terms of the gradual unwinding of the work from home trend as people reluctantly return to the office, Apple and Microsoft look most at risk. The two are, however, beneficiaries of rising capital expenditure in a way that the others cannot match.
What about persistent inflation, rising interest rates and the consequent risk of recession? Here, too, the differences are pronounced. Google is most obviously dependent on online advertising, which has seen a sharp downturn since the outbreak of war in Ukraine. Amazon, meanwhile, is suffering from slowing revenue growth in its core retail business but is seeing growth in its advertising and cloud businesses. As for Apple, the jury is out on how far consumers will try to stretch the gap between upgrades. When cash is tight, who won’t put up with their old phone for a few months more?
So, there is no simple answer to the question about whether the tech sell-off has gone too far. I spoke with one growth-focused fund manager this week who said he had recently bought into Apple for the first time, using the recent pull-back to rectify a missed opportunity which he had always regretted but which has always felt too expensive to put right. He added that he had no intention of getting back into Netflix and Meta, both of which he sold last year. With the FAANGs, one size does not fit all.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
