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The FANGs: A screaming bargain?

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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%.

FANGT Stocks Have Fallen

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Source: Bloomberg, 5 November 2021 - 24 February 2022

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.

Exhibit 66: Market Concentration

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Source: Investment Strategy Groupo, Goldman Sachs Global Investment Research, Compustat

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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Source: Morningstar, data as of 17 February 2022

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).

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