By Mike Taylor
In recent times, some of the greatest exponents of business disruption and innovation would have to be a group of five companies that Wall Street has nicknamed the FAANGs -- Facebook, Apple, Amazon, Netflix and Google (Alphabet). Wall Street created this acronym to capture what are the market's hottest tech companies.
The FAANGs really have changed the world and have had a massive impact on our everyday lives that nobody could have predicted. What's amazing is that, most likely, 99 per cent of the world's population comes into contact with some if not all of these businesses every day. This collection of brands is now as ubiquitous as Coca-Cola.
Think about it. Even deep in Africa, people have iPhones, use Google and post to Facebook. The technological revolution of the 21st Century has caused an explosion in connectivity on par with the changes brought about by the industrial revolution, and the FAANGs have been at the forefront of that.
What's most astonishing is the speed of their ascent. Seemingly from nowhere, in the past 10 years the FAANGs have moved to virtual global domination, obliterating their competition and destroying hundreds if not thousands of established businesses along the way.
In 2007, the FAANGs had combined revenue of about US$57 billion; in 2017 that is forecast to be more than US$550b ($750b). The combined market capitalisation of these five businesses is now approaching US$2.5 trillion - and to think Facebook was only founded in 2004. Contrast this with Coca-Cola, the world's biggest brand, whose revenue has been declining from a high of US$48b in 2012 to a forecast US$35b this year.
The FAANGs' success has been a goldmine for investors. This group is up more than 50 per cent in 2017 and a staggering 40 per cent per annum compounded over the past five years.
Let's not forget, there have been a fair share of naysayers over the years. In 2007, Microsoft CEO Steve Ballmer said "there's no chance the iPhone is going to get any significant market share. No chance."
TimeWarner once dismissed Netflix as a threat on the level of "the Albanian army".
But if you had invested just US$10,000 in Amazon 20 years ago at its IPO, it would now be worth US$6.54 million.
Perhaps the biggest reason why investors have done so well is because nobody in their right mind (except perhaps the founders) believed these companies would achieve what they have, in such a short time.
Despite their impressive performance, the FAANGs have always been among the most heavily shorted stocks.
But on a p/e of 260 times for the likes of Amazon and such a spectacular shareholder return, one should ask, has this trade run its course? I'm not suggesting that these companies won't continue to do well in the coming years, but a few things concern me.
First, they are the best thing since sliced bread at present and seemingly have an infinite amount of blue sky ahead. All this good news and positive outlook is probably captured in the stock price. In reality, it's unlikely that these companies will continue to grow at this pace indefinitely and that's without even considering a stockmarket fall or recession.
Second, in 1965 the average tenure for companies on the S&P500 was 33 years; by 1990 it was 20 years and it's forecast to shrink to 14 years by 2026. The 10 largest companies in 2000 aren't the 10 largest today. Before long, a new group of hot companies may emerge to usurp this group. Maybe something like Tesla or new names we haven't heard of yet.
Finally, the unprecedented amount of money flowing into passive exchange-traded funds (more than US$1t since 2007) has helped drive the price of these stocks higher. Some Nasdaq tracking ETFs now invest about 40 per cent of the fund into the FAANGs, and the higher they go, the more they buy with ETFs. No consideration is given to valuation, outlook of the company, industry or market.
However, I'm not the first to call time on the FAANGs: many have done so in recent years. My main argument at this stage is that I think they are priced to perfection and it's not offering investors a good risk reward. Perhaps one of the group will go on to be the first US$1t company.
I think one of the five probably will, but as an investor, I'd much rather be hunting for the next FAANG stock - and there are plenty out there. Buying something that is out of favour and selling it when everyone wants it is a tried and tested investment model.
So, what's next for the FAANGs? I think their global domination will continue for some time yet. But 10 or 20 years out, there may be new leaders. Even if the FAANGs continue to do well and grow revenue and profit, their stock prices are more likely to be driven by the market and sentiment.
Looking to the future, my pick is that we are about to embark on a green-tech revolution with renewable energy, and companies associated with this could very well be among the largest companies in the world by 2030. And maybe, the world's biggest business of the near future hasn't even been formed yet.
- Mike Taylor is the CEO/CIO of Pie Funds Management. The information in this article is general in nature. Before relying on the information, please speak with an independent financial adviser.