Come Easy, Become Easy: The Tech Takedown!

If at that topographic point is 1 affair that I need keep learned nigh markets over the years, it is that they need keep a means of leveling egos together with cutting companies together with investors downward to size. The final 3 weeks need keep been humbling ones for tech companies, particularly the large iv (Facebook, Amazon, Netflix together with Alphabet or FANG) which seemed unstoppable inward their pursuit of revenues together with ever-rising marketplace capitalizations, together with for tech investors, many of whom seem to need keep false luck for skill. Not surprisingly, to a greater extent than or less of the cheerleaders who were precisely a brusk land agone telling us that null could decease incorrect alongside these companies are inward the midst of a mood shift, where they are convinced that null tin privy decease correct alongside them. As Mark Zuckerberg gets produce to prove to Congress, amidst calls for both regulating together with mayhap fifty-fifty breaking upwardly tech companies, it is fourth dimension to need keep a sober await at where nosotros stand upwardly alongside these companies, what the final 3 weeks need keep changed together with the consequences for investment decisions.

The Rise of Facebook, Amazon, Netflix together with Google (FANG)

The outsized attending paid to the FANG (Facebook, Amazon, Netflix together with Google) stocks sometimes obscures how immature these companies are inward earth marketplace place. Amazon, a fellowship that I valued equally an online, mass retailer inward 1998, a twelvemonth later its listing, is the granddaddy of the group. The Google IPO , remembered primarily because of its occupation of a Dutch auction, instead of a banker, to develop its offering cost was inward 2004, but yous likely completely missed the Netflix IPO 2 years before inward 2002, together with Facebook, the youngest of the four, went world inward 2012. The growth inward marketplace capitalization at these companies is the materials of investing legend together with the tabular array below shows how they need keep almost tripled their contribution to the overall marketplace capitalization of the S&P 500 betwixt 2012 together with 2017 (with all numbers inward billions of U.S. of America $):

At the cease of the 2017, Amazon, Google together with Facebook were 3 of the 10 largest marketplace capitalization companies inward the world.

The purpose that the FANG companies need keep played inward driving U.S. of America equities tin privy last best seen alongside a dissimilar lens, past times looking at the full alter inward the marketplace capitalization of the S&P 500 together with how much of that alter tin privy last attributed to the rising values of precisely these iv companies:

To add together weight to these numbers, consider these facts. The iv companies that comprise FANG added almost $1.7 trillion inward marketplace capitalization over these 5 years together with accounted for one-sixth of the increment inward value for the entire index. Put simply, if yous were a large-cap U.S. of America portfolio manager together with yous held none of these stocks betwixt 2013-2017, it would need keep been very, real difficult, if non impossible, to rhythm out the S&P 500 over this period.

A Reversal inward Fortunes for the FANG stocks

It is the sustained success of these companies that has made the final few weeks together with thence trying for investors inward them together with and thence unsettling for marketplace watchers. While these stocks went through the same ups together with downs that the residual of the marketplace was going through inward February, it was inward the middle of March that they became the fundamental story, alongside the revelations from Cambridge Analytica, a information analytics together with consulting firm, that they had harvested information on nigh 50 1000000 Facebook users (a set out that has since been increased to 87 million) for occupation inward political together with commercial campaigns. The political firestorm that followed has non alone wound Facebook, but the other 3 companies equally well, together with the graph below chronicles the harm inward the days since the intelligence story was released:

The numbers are staggering, at to the lowest degree inward absolute terms. Collectively, the FANG stocks  lost $282 billion inward marketplace capitalization betwixt March xv together with Apr 2 together with contributed significantly to the drib inward U.S. of America equity markets over that period. To set that inward perspective, the marketplace capitalization lost inward precisely these iv companies inward nigh 2 weeks was greater than the full value all crypto currencies (Bitcoin together with all its relatives) equally of the origin of Apr of 2018, mayhap suggesting that nosotros need keep been letting ourselves acquire distracted past times penny change, when dollars are at stake. It is also interesting that land much of the attending has been directed at Facebook, which lost 15% of its value inward precisely over 2 weeks, the 3 other stocks each lost nigh 12% of their value.

Speaking of perspective, though, investors inward these iv stocks should consider to a greater extent than or less other fact before they complain also much nigh beingness punished past times the market. Even alongside the losses through Apr 2 incorporated, the collective marketplace value of these companies remains nigh $400 billion higher than it was a twelvemonth ago, on Apr 3, 2017. 

The bottom line is that 2 weeks of marketplace describe backs cannot need keep away from the longer term success at these companies. If this is what failure looks like, I would dear to run across to a greater extent than of it inward my portfolio.

The Fang Story Line

To empathise both the rising together with recent pullback, let's await at what these iv companies need keep inward common. As I run across it, hither are the salient features:

1. Scaling Success: Each of these companies has been able to decease on revenue growing rapidly, fifty-fifty equally they scale upwardly together with acquire larger marketplace share. In effect, they need keep been able to deliver modest fellowship growth rates, land becoming monoliths.
   
   This success of these companies at delivering high growth, equally they need keep decease bigger, negative reassessment of the condition quo inward that business.

In short, if yous were an investor inward whatever of these companies until 3 weeks ago, the story that yous would need keep used to justify asset them would need keep been that they were juggernauts headed for global domination, together with valued accordingly.

Story Break, Recalibration or Tweak?

If yous need keep read my prior posts on valuation, yous know that I am a bully believer that stories concur together valuations, together with that it is changes to stories that alter valuation. It is withal early, but the inquiry that investors human face upwardly is whether what has happened inward the final 3 weeks has changed the story dynamics fundamentally at these companies.  At the real minimum, nosotros need keep at to the lowest degree noticed that the strengths that nosotros noted inward the final department come upwardly alongside accompanying weaknesses

1. CEO heads cannot roll: Unlike traditional companies facing crises, where CEOs tin privy last offered past times a board of manager equally a sacrificial offering to calm investors, regulators or politicians, the FANG companies together with their CEOs are together with thence intertwined, alongside ability entrenched inward the electrical current CEOs, this alternative is off the table. Even if Mark Zuckerberg performs similar Valeant's Michael Pearson did inward front end of a congressional commission side past times side week, he volition withal last CEO for the foreseeable future, an wages that having voting shares together with controlling to a greater extent than than 50% of the voting rights gives him.
2. The Dark Side of Sharing: I don't know what we, collectively equally users of these companies' products together with services, idea they were doing alongside all of the information that nosotros were sharing together with thence willingly alongside them, but until the final few weeks, nosotros were able to await the other means together with assume that it would last used benevolently. The Facebook fiasco alongside Cambridge Analytica has pushed to a greater extent than or less of us out of denial together with mayhap into a reassessment of how nosotros portion information together with how that information is used. It has also created a firestorm nigh information sharing together with privacy that may resultant inward restrictions inward how the information gets used.
3. No Friends: When other companies experience threatened past times your success together with growth, it should come upwardly equally no surprise that many of them are cheering, equally yous stumble. From Facebook: Friendless, But Still Formidable!
4. Netflix: The Future of Entertainment or House of Cards?
5. Alphabet Soup: Google is Alpha, but where are the Bets?
6. Amazon: Glimpses of Shoeless Joe!