Tech’s Wild Ride — Why FAANGs Are Down As Smartphone Boom Wanes

By  |  November 26, 2018, 5:36 PM  |  Techonomy Exclusive


The tech sector is getting rocked. Here are losses for the FAANG group since the start of October: Apple down $245 billion (23 percent); Amazon $205 billion (21 percent); Google $105 billion (13 percent); Facebook $80 billion (17 percent); and Netflix $50 billion (30 percent). Each of these companies has underperformed the NASDAQ average, which fell 12 percent. This totals approximately $685 billion of market value wiped out in a matter of weeks; to put this in context, it represents about 25 percent of the $1.6 trillion decline in the NASDAQ over the same period. Some of these losses are even worse compared to this year’s peaks; Facebook is actually down for the year and Google about breakeven.

So why is there so much pain right now? Is the FAANG group even viable anymore from an investment standpoint? Fingers are pointing in many different directions as investors and pundits attempt to get to the crux of the why. Some of the biggest concerns are regulatory risk, over-investments by fund managers in the FAANGs, and a worry that the incremental utility of the tech platforms may simply be diminishing.

Some argue there’s already sufficient correction in terms of valuations, since forward P/E multiples are now at or below market multiples. This is the case for Apple, Facebook, and Google, though Amazon and Netflix still trade at lofty premiums. Setting aside regulatory risk, it’s not hard to make the case that the pullback presents a buying opportunity in some respects.

But investors must make a massive assumption to assume that the music will keep on playing. We have to keep seeing an upward slope in smartphone adoption — and further capture of consumer time on the smartphone — across the developed world.  Unfortunately for the FAANGs, we are instead at the end of the smartphone boom in the geographies where it matters most.

Beats on earnings and raises in estimates will no longer be followed by even bigger beats and raises, as was the case for the last few years. Shortfalls are likely to be further punished due to a disproportionate market shift towards momentum-based investing, which will only exacerbate pressures on stock prices.

The end of the smartphone boom means that the FAANGs need to be evaluated through a different lens. The FAANG group best capitalized on the smartphone, which is why it accrued the most value. Now, 11 years after the introduction of the first iPhone, the end is in sight.

Evaluating the next cycle requires identifying the companies that can continue to achieve what I believe to be the primary purpose of technology — saving time. As smartphone adoption grew during the initial boom, a rising tide lifted most boats. But the winners going forward will be determined by who is able to take even more share of consumer time on the device itself. Winning mindshare and consumer attention is likely to be a function of providing quality experiences and time savings as a result of using the device, and will have to be coupled with a commitment to privacy and personal data integrity (i.e. not selling data to controversial third parties).

Based on this analysis, perhaps the best way to rank the FAANGs for the coming stage 2.0 is to move that “F” to the end, even if AANGF does not roll off the tongue. But then, today’s market conditions are already not feeling too palatable.

Here, in descending order, are the companies with the best prospects:

James Cakmak was for 10 years, until recently, a Wall Street security analyst covering the internet sector. He is also co-founder of Snailz, a nail salon booking app now operating in New York. Follow him on Twitter: @JamesCakmak

Ryan Guttridge, Adjunct Professor at Smith School of Business, University of Maryland, contributed to this article.

 

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