FAANG Stocks: The Sun Has Set On Their Dominance

FAANG stocks Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and Google/Alphabet Inc (NASDAQ: GOOGL) have been the stockmarket story of the era, much like the BRICs (Brazil, Russia, India and China) and TMT (technology, media and telecom) defined previous five-to-10-year periods.

These companies have created new industries, disrupted old ones, and changed the way billions of people find information, communicate, shop and entertain themselves. They have changed our expectations for how easy and intuitive daily tasks well beyond their immediate commercial boundaries should be.

If, with one click, I can buy a pair of shoes or order a movie, then checking my bank account, applying for a vacation with my employer or filing my tax return should be just as simple. They have changed our sense of time, from how fast someone should return your message, how much time information gathering should take, and when a product should be delivered. Their scope of influence is vast. They have innovated and solved challenging technical problems across a wide array of fields. They employ thousands of the smartest people on the planet across every discipline. Expectations of future success are high.

In this and following reports we argue that the next 10 years will look very different from the last decade for these five companies. Markets that they created are maturing and competition is intensifying. Not all companies in industries that are being disrupted have given up and gone away. Many of these ‘old world’ companies are now off the ropes and fighting back, and are proving to be far more formidable opponents than many have given them credit for. In some cases, the FAANGs have entered each other’s markets and have become head-to-head competitors. Profitability will suffer from market maturity and rising competition.

There is more to information technology than FAANGs, and Aoris owns several IT businesses including Accenture, CDW, Amphenol and Jack Henry. These companies haven’t created or disrupted markets, yet they are leaders in attractive fields and have delivered many years of enviable earnings growth, with strong prospects for continued success.

The era we have left behind

Over the last decade or more, the five giant US technology companies that are collectively known as the ‘FAANGs’ have come to occupy increasingly dominant positions in very distinct markets. Each has seen off competitive attacks, acquired or killed aspirants, overcome internal missteps and, in some cases, beaten back regulatory pressure to cement their position as the unrivalled force in their particular market.

Each of these six businesses ‘owns’ a single field and does so across the Western world:

  • Facebook – owns social media and co-owns online advertising with Google
  • Apple – co-owns the personal devices market with Samsung
  • Amazon – owns online retail
  • Netflix – owns subscription streaming video
  • Google – owns online search, and co-owns online advertising with Facebook

Near-monopoly positions in growing markets have produced eye-wateringly attractive profit margins for most of the FAANGs and company valuations to match. FAANGs account for four of the five largest corporations in the developed world by market capitalisation. In the eyes of many, the success of the FAANGs in repelling competition and regulatory threats has created an impression of invincibility. A common viewpoint is that these companies operate in ‘winner-takes-all’ markets and that the winner has already been decided. A prosperous future seems assured. However, this perception of inevitability is misguided.

The era we have entered

Three members of the FAANGs are facing twin challenges to their core businesses: maturing markets and rapidly rising competition. Importantly, rather than coming from fringe players that can be killed off relatively easily, the source of competition is now fellow behemoths with vast reserves of cash. One member is experiencing a singular primary problem – maturation of their core market – while another faces the singular problem of rising competition.

We’ll cover the outlook for each of the FAANG stocks in follow up series. Check back here in coming days or see below:

This article was written by Stephen Arnold, CFA, founder and Chief Investment Officer of Aoris Investment Management. Click here to download Stephen’s free Owner’s Manual for investing better.

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