One’s a perpetual participant in government hearings, the CEO of one is going through a messy divorce, and another one is a disruptor about to face its own disruption. Is FAANG Fury starting to bite?

Over the past few years, if you wanted to invest in companies almost guaranteed to go up, you’d pour into FAANG stocks — that is, Facebook, Apple, Amazon, Netflix, and Google.

However, as 2018 drew to a close something unusual happened — they all started to go down.

Facebook went down by almost 40 percent, Apple by about 25 percent, Amazon by about 27 percent, Netflix by a whopping 38 percent and Google by just over 20 percent towards the end of the year.

But they’ve all since rebounded — leading investors to wonder what happened in the first place, and whether the slide was just a dip in a continual growth story or not.

Chart from Bloomberg

Investors started to wonder if the huge share buyback programs instituted by the likes of Apple were in fact propping up FAANG stocks and the broader NASDAQ market — fuelling appetite for tech stocks more broadly.

They also started to wonder about the highly inflated price-to-earnings ratios enjoyed by FAANG stocks, ranging from a ‘reasonable’ 19x for Apple to a slightly less reasonable 243x for Netflix.

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All these trading signals led to a snowball of doubt and further questions about some of the headwinds facing FAANG stocks — or, was the late 2018 dip a sign that the headwinds were starting to outweigh the valuations?

This was fuelled by a broader ‘tech lash’ against FAANG stocks as these companies’ ‘creepy’ use of customer data and increasing market power made people question their relationship with these companies.

Three months into 2019, although there has been a recovery, FAANG stocks still face some pretty big looming questions — but they also offer compelling reasons to pile in.

So, what are they?

The big questions facing FAANG stocks in 2019

Facebook

 

The headwinds

Where to begin with this one?

It seems like every day there are more questions about the creepy ways Facebook is using data and tracking people around the internet to serve us better targeted ads.

There was no better illustration of this than the Cambridge Analytica scandal which saw Facebook data become a key player in the election of Donald Trump.

Then there’s the scarier headwind (to investors anyhow) of slowing growth in users.

There has been a worry that Facebook has hit somewhat of a plateau in more mature markets such as the US and Canada — and this is being fed by a sense that Facebook is just plain ‘uncool’ to the newer generation of social media users.

The upside

Facebook is still a pretty huge platform, and its advertising options continue to become more sophisticated (partially because of the aforementioned data creepiness).

According to its latest quarterly numbers, the number of daily active users is still growing (up 9 percent year on year to 1.59 billion) while its ad revenue jumped 30 percent year on year to US$16.6 billion.

Given ad revenue is up three times as much as the rate it was able to add more users — meaning it’s pretty effective at getting every dollar it can from users and advertisers.

Apple

The headwinds

Earlier this year Apple told investors that sales had collapsed in China, partially because of trade tensions between the US and the middle kingdom.

Whether it is because of trade tensions or Chinese consumers just aren’t digging iPhones, a reduction in China revenue from $18 billion to $13.2 billion year on year isn’t a great look for a company trying to crack the Chinese market.

Then there’s that old chestnut about handset sales (the very same sales which made Apple into the behemoth it is today) dipping — with shipments down 7.3 percent year-on-year.

The upside

The good news is that Apple has been looking for growth outside of handsets — notably in wearables and the potentially lucrative payments market.

During its latest investor call, CEO Tim Cook said its wearables business was up 50 percent, and combined with its focus on Apple Pay, it is offering investors a glimpse at an emerging growth story.

In fact, Australian banks were recently warned that if they didn’t offer Apple Pay that customers could walk — as phone payments continue to increase in popularity.

Amazon

The headwinds

Well, there’s no polite way to put this: Amazon’s CEO is going through what some investors fear may become a pretty messy divorce.

Aside from speculation that half of Jeff Bezos’ Amazon holdings could go to MacKenzie Bezos, there’s also the fear that reporting around the divorce could impact on Jeff Bezos personally.

Although Amazon is a behemoth, so much has been built around the reputation of one man as the founder of the company.

Aside from that, Amazon is also facing its own ‘tech lash’ moments as questions continue to rise about the conditions faced by Amazon workers in fulfilment centres and just what Amazon is planning to do with the data gathered by Alexa.   

The upside

Amazon is still a ridiculously large company, and has become part of the fabric of the consumer experience.

It continues to set expectations of what retail should be, and its integration into the home means that it will become part of the fabric of our lives.

There’s also the not insubstantial matter of Amazon Web Services, which provides on-demand cloud computing services to millions of businesses.

It’s currently the fifth-largest business software provider in its own right.

Netflix

The headwinds

Netflix is expected to spend $15 billion on original content this year, because it has to.

With Disney set to launch its own streaming service and a raft of content providers set to pull back-catalogue access, Netflix is finding that the playbook which got it to the position it’s at now won’t work over the next five years.

Instead, it’s had to pour cash into creating a whole stack of content, and then marketing that content.

That spending is partially being fuelled by debt, leading to concerns that despite audience growth its balance sheet could be over-leveraged.

The upside

BoJack Horseman is pretty great.

 

But seriously though, its aggressive international push combined with its original content slate means that its international customers are its strongest centre of growth.

Which is a good thing, because the world is a bigger pond than the US and Canada.

Longer-term, it could always flick the switch on an advertising model, which would be a step-change for the company.

Google/Alphabet

The headwinds

Google is facing a raft of regulatory challenges around its use of data, most notably in Europe where the introduction of GDPR is giving it a few headaches.

In fact, it was the first company to be fined under the new scheme, copping a €50 million fine in France for a breach. While that is play money for the company, it’s appealing the decision.

It’s doing so because it’s worried that it could set a precedent in the treatment of tech giants by regulators — no doubt spurred on by governments reacting to the broad ‘tech lash’ underway.

Meanwhile, the Google owned YouTube is facing its own problems as an advertising platform. There is mounting pressure from advertising companies to stop their ads appearing next to inappropriate content, and subsequent realisation that policing all the content on the platform is just too much to do manually.

There’s also the small matter of 2018 cost-per-click sales going down 29 percent compared to 2017.

The upside

It’s Google.

Its dominance in the advertising market is well-established and entrenched.

In the fourth quarter its annual revenue was up 23 percent year on year to $136.8 billion — and up 22 percent for the quarter to $39.3 billion.

The majority of that quarterly figure was made up of advertising revenue ($32.6 billion) — which in itself was an increase of nearly 20 percent on the previous quarter.

 

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.