FAANG stocks have been one of the biggest casualties of the sell-off in US stocks since late August. We have a look at how the FAANGs are performing, what challenges they face and consider where they go from here.
FAANG stocks deliver mixed performance in 2018
||2018 start - peak
||Peak to 29 Nov
||2018 year-to-date gain
|Nasdaq Composite benchmark
(Correct as of close of trading on 28 November 2018. Start to peak represents the gains from the beginning of 2018 to their respective highs for the year. *FANG+ includes additional stocks: Alibaba Holdings, Baidu, NVIDIA, Tesla and Twitter)
A few months ago, after Apple pipped Amazon to become the first publicly listed company to earn a $1 trillion valuation, the outlook was firmly centred on share prices storming higher and the debate was on who would be next to earn the illusive title. Today, Apple has seen its value drop closer to $860 billion, and Microsoft briefly became the most valuable firm for the first time since it last sat atop the leadership board two decades ago. Although Apple was the first to win the title the race is firmly back on: Microsoft is only a fraction behind with a value of $853 billion followed by Amazon at $820 billion.
Read more about Apple winning the race for $1 trillion valuation
The knock to the FAANG’s share prices over the past couple of months is due to a combination of shared problems and individual woes. Investors in all five have been awash with fears that the double-digit rates of growth they have become accustomed to are starting to wane and almost all have come under more regulatory pressure this year than any other.
Additionally, competition between the FAANGs is constantly increasing. Although they have long been competing with one another in certain pockets of the market, each has been operating in their own distinct industry with different drivers. But their appetite for expansion has seen them diverge into one another’s territory and the rivalry is set to grow fiercer as time goes on.
With confidence waning, we have a look at the challenges facing Facebook, Amazon, Apple, Netflix and Google following a tough 2018.
Facebook shares take hit as political problems snowball
Facebook has by far had the toughest year of any of the FAANG stocks. The eruption of the Cambridge Analytica scandal has unravelled to depths that no one thought possible – from its mishandling of probes to how it responded to Russian interference in the US election, to its inability to prevent extremist and illicit content, fake news, fraud and cyber bullying on its platform. It also suffered its biggest-ever cyberattack after sensitive information on 30 million global users was hacked (less than the 50 million originally stated).
Read more about whether Cambridge Analytica is a threat to Facebook’s shares and reputation
For chairman and chief executive officer (CEO), Mark Zuckerberg, who’s appearance in front of the US Senate in April marked a rare public appearance, disapproval of his leadership is only growing as each new problem is revealed. The founder, who’s platform has 2.3 billion users, has refused to communicate with global authorities and has often been criticised for trying to be above government – his no-show at a the inaugural hearing of the ‘International Grand Committee on Disinformation’ outraged the representatives of the nine countries taking part, with Canadian lawmaker Charlie Angus telling the deputy that had been sent in Zuckerberg’s place that ‘we've never seen anything quite like Facebook, where while we were playing on our phones and apps, our democratic institutions...seem to have been upended by frat boy billionaires from California’. UK authorities recently seized internal Facebook documents as part of its investigation into how the platform handles personal data, which the committee has been prevented from releasing (so far) due to legal appeals from Facebook.
In addition, reports that Facebook hired a consultancy firm to help smear its rivals trying to capitalise on its problems around security and privacy have only strengthened the argument that Zuckerberg either has far too much control or not enough. He claimed no knowledge of the relationship with the consultancy firm in question (the contract was ended soon after the report emerged) and said the same for his team, suggesting the top layer of management is detached from a company that many argue has grown too big to handle itself and is certainly too big to have a joint chairman and CEO.
The reason other big tech companies like Google, Apple and Amazon have come under increasing fire from regulators and lawmakers this year is because of the serious questions about Facebook’s role in society.
While it seems Zuckerberg is still adverse to personally interacting with regulators the company is certainly trying to warm to governments. If you don’t work with governments to formulate the legislation, then you miss the opportunity to mould your own regulation and risk finding yourself operating in a very unforgiving environment. For Facebook, 2018 has been about trying to get in front of its own problems and show it is finding the issues and fixing them, not responding to media claims and investigations about issues that make it look like it is out of control.
Learn more about the history of Facebook
Like Amazon, Apple and Google, the platform has backed calls for the US to adopt a new regulatory policy at a federal level in fear of having to navigate different state-by-state laws (California, for example, has introduced its own stricter data protection laws compared to other US states), and urged for the EU’s General Data Protection Regulation (GDPR) to be used as a foundation in an attempt to widen the approach to an international one. There are calls for international regulation to follow on from the UK’s decision not to wait for a consensus by introducing a Digital Services Tax, designed for Facebook and Google that will tax 2% of UK-generated revenues from April 2020, raising £400 million annually by 2023.
There are two reasons why this matters from an investment point of view. Firstly, new regulation brings higher costs that can easily start to eat away at margins – costs in the latest quarter rose over 50% and outpaced revenue growth as it hired a flood of new human moderators to beef up its content monitoring efforts. Secondly, the failure to address concerns about content and the apparent lack of control it has over what people are posting has already harmed its reputation. Yes, Facebook has not seen a mass exodus from its service despite all the troubles this year, but engagement is declining and growth in ad revenue (its primary income) has slowed partly because some companies have boycotted the platform. Household goods giant Unilever is one of the most high profile companies to stop advertising on Facebook after discovering its adverts were appearing next to extremist content.
Read more about Facebook’s mixed Q3 earnings report
Lower engagement and inappropriate content does nothing to help Facebook boost sales, especially at a time when it is trying to unlock the next phase of growth through new services that are yet to generate a penny for the business despite their high usage, like Messenger, and newer services like video service Watch and new Facebook feature Stories, which has essentially stolen Snapchat’s (SNAP) concept.
New regulation on the horizon, rising costs, uncertainty over its next wave of growth and the reputational crisis have all soured investor’s appetite for shares, particularly when there are other online advertising firms like Google that have managed to largely avoid the heavy scrutiny that Facebook has been under this year – an upbeat view on Facebook would have to accompanied with a downbeat outlook for competitors Google and Amazon.
Amazon shares suffer from slower growth outlook
The fundamentals behind Amazon are among the strongest among the FAANGs. The company champions ecommerce but makes its money from its cloud services division AWS, and it has plenty of levers to pull and new channels of growth to chase, particularly through the likes of Whole Foods.
Read more about Amazon’s bid to buy Fox sport network
However, the same concerns about growth have hindered Amazons share price in the latter half of this year, although it still up over 40% in 2018. The catalyst has been a slowdown in growth coupled with a warning that it could slow further. Third quarter (Q3) revenue was still up an impressive 29%, but that was behind the 43% growth in Q1 and 39% in Q2. And in the all-important Q4 of 2018 that includes the Black Friday sales (Cyber Monday this year was Amazon’s biggest-ever sale day) and the seasonal holidays it is only expecting growth of between 10% to 20%, way below the 30% analysts had originally expected. That, coupled with the fact that quarterly growth is on a downward trajectory across all its core areas, from Prime subscriptions to ecommerce to cloud services, has dampened investor optimism but far from dashed it.
Learn more about Amazon’s Q3 results
Interestingly, Amazon’s online advertising business has been attracting increasing amounts of positive attention after quarterly revenue more than doubled year-on-year (YoY) to $2.5 billion. What is sometimes unappreciated is the fact that its ad business, while substantial in size, is only one tentacle of the octopus that is Amazon and it is already the third-largest online advertising platform, behind Google and Facebook (that both rely considerably more on their ad revenue). Amazon has a lot to fall back on should its ad business stutter, more than Google and considerably more than Facebook.
Read more about Amazon suffering major data mishap ahead of Black Friday
For Amazon, trading well above 80 times 2018 earnings, focus is on whether its ambitious expansion plans will pay off. It competes on so many different levels with the hope of adding more, some with formidable competition. Its involvement in cloud services, video streaming, tablets, smart speakers and ecommerce means it is competing with all the other FAANGs one way or another and plans that include running physical supermarkets not only come at a high cost but with high expectations.
Learn more about whether the Amazon share price is valued correctly and where is it headed next
Remember, despite all the applause Amazon earns not all of its hopes come true. It announced it will close its London takeaway delivery service after failing to compete with companies like Deliveroo and Uber.
Read more about the Uber and Deliveroo merger on the cards with Amazon on the sidelines
Apple shares fall over concerns we’ve reached peak iPhone
Hype had built around Apple’s latest result because of the string of new products that were released beforehand, with new Macs, iPads and three new iPhones raising analyst expectations that sales in Q4 of 2018 could be over $100 billion. But, like the others, Apple disappointed by stating sales would be between $87 billion and $93 billion. Still, that would be up from $60.5 billion last year.
Read more about Apple delivering an underwhelming Q4 earnings report
The debates around Apple’s prospects centre on demand for its hardware. The number of new smartphones in general is falling, people are holding onto their handsets for longer, and cheaper competition is winning market share in the fastest growing markets like India, where Apple’s products are simply too pricey for most to afford. Apple has continued to smash analyst earnings forecasts, but this has been solely down to price - every new iPhone model costs more than the last and this has been offsetting flat volumes. The most expensive model of the new range, the iPhone XS MAX, starts at $1099 and its ‘more affordable’ XR is priced at $749, more than any of its predecessors. The average iPhone selling price in the last quarter was $793, up from $618. Plus, numerous Apple suppliers have cut their own guidance, prompting fears over a softer-than expected reception to the company’s latest products.
With many convinced Apple has squeezed what it can out of the smartphone market, plenty have turned the investment case to software, which is increasingly being considered Apple’s long-term future. This involves its services such as iMessage (the biggest rival to Facebook-owned Whatsapp), the App Store (the biggest rival to Google’s Play Store), Apple Music (the biggest rival to Spotify), iCloud (competing with Amazon and Google), and its Siri voice assistant (which competes with Amazon’s market-leading Alexa and second place Google Assistant). Morgan Stanley forecast earlier this year that almost two-thirds of Apple’s future growth will come from content and digital services, both of which offer much higher margins than flogging phones, and that add-on hardware such as Apple Watches will make up 30% of total revenue within the next five years.
Read more about where next for Apple after earnings take a bite out of valuation
However, it is far too early for investors to start ignoring Apple’s hardware. Its products act as the anchor of its digital offerings: people who use iPhones use Apple Music and so on. But, if Apple is aiming to offset slower growth in volumes with higher prices then it might run into trouble. If people are less willing to upgrade then they need even more reason to pay up for the latest model, and if it already comes at a premium then customers expect even more in return. Much of this will have to come in the form of the software that it can exclusively offer to its iPhone users, like new video content (a streaming service to rival Netflix is on the way). Although a necessary move, it will take considerable time for even Apple to completely overhaul its business model, but fortunately it has enough cash for whatever is around the corner.
Netflix shares fall as debt and competition rises
Netflix’s membership in the FAANGs is not based on size or profits but its fast-growing nature and first-mover dominance in a very immature market. It is the only one not to make money and valued at just £120 billion but feeds on the potential of its largely unrivalled leadership in video subscription services. Amazon has long been the only company to rival Netflix but even it has struggled to unseat a company with more than double the number of subscribers.
The company has had to spend big to get where it is today. It took on $2 billion worth of debt to help fund the 1000 new productions it will release this year to add an already hefty $8 billion debt pile, and has plans to significantly up investment in content next year as a barrage of new big name competition enters the market. Disney, AT&T, Apple and even Wal-Mart are all expected to launch new streaming services from 2019 onwards to try and steal a slice of the pie that Netflix largely has to itself. UK authorities have even called upon public service broadcasters – BBC, ITV, Channel 4 and Channel 5 – to band together to launch a new service. Between them, they produce some of the UK’s most popular series: the show Bodyguard was produced by ITV, broadcast by the BBC, and licensed out internationally to Netflix. Like Disney and AT&T, it seems those that produce content are simply no longer willing to share it with the partners like Netflix as they all prepare to launch their own services to capitalise on their own exclusive content.
Learn more about whether Netflix can survive new competition from Disney, AT&T and others
With more competition, rising debt and cash being burnt, the question being posed to Netflix is whether it can fend off the new competition, and (more importantly) whether it can afford to.
Google shares dragged down by privacy and security concerns
Google, which accounts for virtually all of Alphabet’s sales, has also seen shares suffer from a slowdown in ad revenue growth, rising 21% in Q3 from 26% in Q3. The fact that Amazon’s ad business was a standout performer exacerbated the view on Google’s results.
Amazon has also been infringing on Google’s core search business, with reports from eMarketer showing that 47% of online product searches in the US start directly on Amazon compared to 35% that started on Google. That, in turn, helps acquire the rich data it needs to steal advertisers away from Google. Still, Google is by far the Internet’s favourite search engine in Western markets, accounting for 63% of all US searches in July 2018 (versus 58.5% in 2008), according to Statista. The picture in the UK, however, is more interesting as although Google holds 83% market share that is down from 88.5% three years ago.
Learn more about Amazon vs Google in the battle of the tech giants
Google, despite its best efforts, has been embroiled in the global outcry over the privacy and security of our personal data and how it was used for profit. It was fined over €4 billion by the EU earlier this year for abusing its dominant position in the Android market (which it is appealing), part of a long-running dispute. That follows a multi-billion fine for abusing its position in shopping services (which is also still up in the air) and another investigation into its core search and advertising business that is yet to be completed.
The company has been trying to distance itself from Facebook. For example, Amazon, Apple, Google and Facebook have all released their next generation of smart speakers equipped with screens and, in most cases cameras, but Google has emphasised the deliberate decision not to include a camera to make people feel more comfortable about having what can be viewed as a highly intrusive device in their home. This is unlike Facebook’s Portal device with camera and microphones for the use of video calling through its Messenger app.
Read more in our guide to investing in smart speakers and virtual assistants
Problem is, Google is not immune to the problems that have hit Facebook and any regulatory or legal fallout that comes from the multiple investigations being carried out in the US, UK, Europe and beyond will certainly have ramifications for the business. After revealing data on 500,000 users was hacked back in 2015 not only did it fail to show it was not susceptible to security flaws like Facebook but it looked untrustworthy because it didn’t tell anyone for years. That led to the closure of Google+, its social media site it once hoped could rival Facebook.
Both suffer from similar problems: advertisers and content producers publish content on both platforms using automation, giving little control over what is going through the systems. This is largely because both have relied too much on ineffective artificial intelligence (AI) to monitor content, resulting in inappropriate material slipping through. These AI solutions could solve the problem one day but not yet, and therefore both have had to spend on recruitment and straightening up their processes this year. Google’s total spending outpaced revenue in the latest quarter and capital spending was up 49%.
The other growing issue at Google is staff. Although Amazon, Apple and Facebook have seen a growing amount of staff dissatisfaction the impact of disgruntled employees at Google is proving profound. While the complaints about how it handles sexual harassment claims is causing an internal rift within its management system staff protests about the company’s morals and ethics are starting to come at a price, and a huge one at that. Google’s decision to withdraw from a $10 billion Pentagon contract was prompted by employees objection to an existing agreement supplying face-recognition technology for use in military drones under ‘Project Maven’.
The contract is valuable because it is being awarded to one company rather than being broken up, like companies such as Oracle have called for, and is seen as a possible precursor deal to the much more valuable contract in the pipeline to move all of the Pentagon’s operations to the cloud. The theory is that Google’s loss is Amazon’s gain, as the leading cloud provider has said it would have no problem dealing with the US military. The same could prove true for Google’s plans to re-enter China after leaving in 2010 through ‘Project Dragonfly’, but said it is nowhere near an operational stage. Staff have again raised concerns about how it would deal with the strict censorship in China and the sort of access Chinese authorities would have to the data that it would collect. The ongoing tensions between the US and China won’t help encourage the idea either.