The FANGs: A screaming bargain?

The US tech giants – Facebook, Amazon, Netflix, Google, Microsoft, Apple, Nvidia, Tesla (FANGMANT) – have been the engine room on the stock market the past 10 years.

Thanks to swelling earnings and margins, these companies have marched ever higher and carried the global share market with them.

In 2021 the S&P 500 returned 28.7%. Yet FANGMANT, which takes 27% of the S&P’s weight, generated a 40% return. Excluding the FANGMANT, the return of the S&P would have been a lower 24.9%.

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But in 2022 the good times seem to be over. Shares in the FANGMANT have come under sustained pressure as interest rates rise and user growth slows. Facebook and Netflix have each fallen almost 50% from their peaks. While the rest have fallen this year to varying extents.

No one knows how high-interest rates will go or how long they’ll stay high. This creates uncertainty for fast-growing technology businesses, whose values largely derive from estimates of their future profits. And has meant the prevailing attitude among investors is that FANGMANT could fall further.

But amid the declines, it is important to keep perspective. The FANGMAT remain highly investible regardless of interest rates. And as they make up such a large portion of the S&P 500, MSCI World and Nasdaq 100, their fate will be shared with the global share market as a whole. What is more, these companies still have strong growth prospects. If their share prices continue falling, investors may consider buying the dip.

Global monopolies

The FANGMAT stocks have extremely strong market positions—in many cases approaching legalised monopoly. Microsoft in office software; Apple in phone and laptop hardware; Amazon as a cloud webs service provider; Nvidia in graphics cards; Tesla in batteries; Google in search engine – the list goes on.

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The strong market positions mean the FANGMAT enjoys what economists call “low price elasticity of demand”. In other words, they provide great services and can raise prices without losing many customers.

Good examples of this include Tesla’s cars and household batteries. Tesla recently raised the prices of its Model S and X in Australia and the Model Y in the US. Yet sales growth has continued. Netflix is steadily increasing its subscription costs, yet has raked in new and retained old subscribers. Nvidia is the best example of all. The prices of its graphics cards have more than doubled since 2016, yet they continue to sell out.

This low price elasticity of demand means that the FANGMANT can raise prices when inflation rises. And in this way, protect their profits and margins. The strong market positions also translate directly into strong fundamentals. The FANGMANT’s earnings-per-share growth over the past three years has been above-average. In some cases, such as Netflix, considerably above average.

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The strong earnings have helped build huge cash piles. Google’s US$140 (A$194) billion cash pile is bigger than the market capitalisation of every Australian company and bigger than the market capitalisation of most S&P 500 companies too. Netflix, which sits on US$6 billion of cash, looks to sit on a small horde in comparison to its peers. These cash piles can be used for many things, including buybacks and new investments.

Venture capital without the 2/20

The market believes that the FANGMANT’s next three years will be less impressive than their previous three. This is visible both in the companies’ share prices and in analyst estimates. Covid is partly to blame. Lockdowns were a big boost for the FANGMANT stocks, as they radically increased internet uptake (online shopping and work-from-home).

While the covid boost has passed, there remain attractive growth prospects for the FANGMANT elsewhere, even as the world re-opens. These growth themes include:

• Video games and esports

• Cloud computing

• The metaverse

• Outer space

And make no mistake—the FANGMANT are a great way to invest in these new and exciting technology themes. Like Silicon Valley venture capital firms, the FANGMANT make their own investments in startups. Vast and sprawling corporate empires, all the FANGMANT have finance teams that work much like internal venture capital funds. On this score, analysts have long understood that an advantage of investing in the FANGMANT is that investors can participate in investing VC tech investment, without the usurious 2% and 20% fees of many limited partnerships.

Current exciting investments include Google’s bet on space technology like Planet Labs. Amazon’s bet on self-driving cars like Rivian. And Facebook’s highly publicised Metaverse push.

Conclusion

A wise man once said that the best time to get greedy is when others get fearful. As investors fear the good times are over for the FANGMANT, those willing to take a risk may consider buying the dip.