I hereby call a meeting of the FAANG inclusion committee, on the agenda:
- Decade in review: how we the committee became one of the best stockpickers in the world
- Additions / deletions:
3. Two radical proposals for the future of the committee:
3.1 Renaming as GAMA
3.2 Dissolution of the FAANG
4. Any other business
We love stories. We live in an era of memes and stories, and FAANG story has stuck better than most in providing a vehicle to think about market dominance over the last decade. We’re approaching the 10 year anniversary of the 2013 coining of FANG by commentator Jim Cramer.
Back in 2013 the original FANG 4 had a combined market cap of a little over $550bn, now it’s $4trn
Along the way Apple got formally added to this group, and informally (and later) Microsoft. So today the total market cap of FAANGM (you can see why that one never caught on!) is nudging $9trn, making these half-dozen stocks bigger than every single global stock market aside from the Nasdaq and NYSE.
You probably don’t need to be reminded of the performance, but here it is for the record care of Ed Yardeni. Performance of FAANGM since 2012 is up 7x, compared to the S&P 500 without FAANGM up 1.5x.
But we’re getting ahead of ourselves. If we’re going to start discussing inclusions and deletions we need to go back and decide with the original criteria looked like.
FANG represented a story, so it’s always going to be hard to pin down exactly. Back in 2013 the original 4 FANGs were all thought of as high growth tech stocks (today, none are classified as tech). Back then they represented the future. Fast-growing, disruptive platforms that had moved beyond the dot-com era frothiness, but were still a little speculative, growthy and traded on high multiples of their (then low) accounting earnings.
Back then, Apple, despite being huge, was in that era where it was priced as a more plodding, pedestrian device maker: dependent on the latest launch and vulnerable to the inevitable flops. Around 2016 as Apple became continuously re-rated by the market into something different, it started to look a little more like the FANG stocks and so we had FAANG.
The thing is, what seemed like the future in 2013 arrived in a hurry. By 2018 these stocks were not really speculative futuristic plays any longer, they were among the largest companies in the world, reliably churning out cash and profits at staggering rates – hundreds of billions in revenue at 40%+ profit margins and growing at startup-type rates even as they became the largest stocks in the market. Ed Yardeni consistently produces some excellent research on this, and you can see this maturing story pretty clearly through the falling price-earnings ratios of the core FANG stocks below (earnings is a pretty poor way of looking at the economics of these stocks by the way, which is one of the challenges the market has had with them over the years , but it shows the story). The interesting point you can see right away is that Microsoft goes the other way, it was re-rated from being a “boring” company to a more growthy FANG-like rating, just as the original FANGs were going in the other direction.
In a seldom-discussed (but I think significant) moment, the original FANG were re-classified in 2018 out of the tech sector according to what they actually did: Google and Facebook as advertising companies moved into communications, Amazon into consumer discretionary and Netflix, an entertainment company, into communications. This marked a significant moment in terms of their coming-of-age and maturing, which I think went underappreciated. The stock prices however continued their stellar upward march, further solidifying the FAANG narrative as one of the dominant market themes of the 2010s.
As an aside I think many institutional money managers underestimated this moment , meaning that FAANG stocks have remained under-owned even while being the largest stocks in the market. The asset managers were so stuck on the view of the FAANGs as trendy, over-hyped, over-priced futuristic stocks they missed the moment where they became the leaders of the present day, with some of the best fundamentals of any group of stocks in history. Indeed the FAANG moniker itself could have contributed to this. Managers were unable to revisit their thesis, and remained underweight. In a related issue, the re-classification into communications and consumer discretionary sectors permenantly broke many quant processes, especially sector-neutral value as suddenly a lot of past data was rendered pretty meaningless, which compounded the issue that many institutional money managers had in wrestling with how to think about these stocks. The re-classification also meant managers could now get underweight pretty much all of these names across multiple sectors rather than having to pick some of them within tech.
By early 2020 the FANG narrative was looking like it might have run its course, not surprising after the better part of a decade, few stories last that long. But of course covid arrived to give it one final turbocharged mega-boost as these stocks surged after the initial market crisis of March 2020. What had been a speculative, disruptive, futuristic growth story, now became a market concentration in the here and now story, as FAANGM ballooned to over 22% of the S&P 500, and accounted for a hugely outsized share – as much as a third – of the major indices overall gains.
Right, let’s talk inclusions.
Microsoft – a comparatively ancient software company that had been the largest company in the world as far back as 2000. By 2016 it was starting to become clear that there was a new trajectory going on here as the cloud changed Microsoft’s model so that it was suddenly able to grow faster, and more profitably as a $1trn+ company than it had decades earlier as a $200bn company. 2016 was – amazingly – also the moment that Microsoft stock finally exited its post dot-com era drawdown. That story has pretty much continued ever since (aside: I find it interesting that despite all the talk around things like AI and crypto, the dominant technology of our time is still arguably cloud). Anyway, Microsoft gets added. FAANG became FANMAG or FAANGM.
In market cap terms Netflix was always arguably the odd one out in this group, but the stock price performance and the sense we were seeing a piece of the future here put it at the heart of the FANG story. Netflix was really petering out by around 2017 though as competition mounted, and despite a pandemic-era boost the stock price today is lower than it’s mid-2018 peak. With a market cap of $170bn it’s still something like the 30th largest company in the world, but at less than a tenth the size of Alphabet , it just doesn’t fit at this top table anymore. It’s revenues got overtaken by Youtube, and are just around a third of just Apple’s services business, Apple could just about buy it with cash on hand. It’s not in the same league anymore.
A neat replacement looked ready-made as Nvidia rocketed close to a $1trn market capitalisation in 2020. But again this doesn’t fit the maturing FAANG story. Nvidia’s revenues are actually pretty similar to Netflix at around $27bn, again only a fraction of an Apple or Amazon.
Of course we have to talk about Tesla. As the electric car-marker accelerated toward its own $1trn milestone the clamour grew for it’s inclusion in this group (FANMAGT or FATMAN maybe). but again this is missing the shift in the FANG story at this point. Tesla has always been on its own path and a look at its revenues and profits shows that it in no way resembles the reliable money-printing, businesses most of the FANGs had become. Tesla is a huge story for sure, but doesn’t fit FAANG.
A radical proposal
Sitting here at the start of 2022, I am going to make the case for the dissolution of the FAANG committee henceforth. There is no longer a consistent narrative binding these stocks – indeed we’ve removed Netflix, and Facebook (now Meta) has seen its market cap plunge to a level that takes it off the top table. Indeed, what we’ve seen in the latest earnings season is the emergence of a handful of different stories relating to these stocks: Facebook, Netflix, Nvidia: down. Amazon, Apple: up. It’s almost as if each stock is trading on its own fundamentals. Morningstar agree that the FAANG market is fading.
If a full dissolution of FAANG is too much for you then there is one alternative to consider: GAMA. That’s Google, Apple, Microsoft and Amazon. The four biggest US stocks, all above or close to $2trn market cap. There isn’t really the same story here though, no unifying narrative that captures the imagination as far as I can see. Two of the four are relatively “ancient” tech firms, the others are both over 24 years old. They are the four market leaders and dominant companies of our time, I can’t see it’s particularly interesting to turn the four largest stocks in the market into a story, they aready are a story by default at this point.
There’s an old saying that bull markets don’t die of old age. Maybe the same is true of narratives, but FAANG has lasted longer than most. A lot of smart people have been wrong in predicting its death by excess or bubblebursting crash. Predicting a slow fade-out isn’t as interesting. Maybe one reason why it continues is the lack of any persistent competing alternative stories that link together multiple stocks (I guess crypto is one obvious candidate here, and the major 2020 winners Zoom/Peloton / Robinhood/ Coinbase , but that hasn’t lasted long ). Maybe there aren’t really any. Perhaps one will emerge out of the current tech bear market.
What are the takeaways for investors? I think one of them is that it is always (slightly) different this time. Don’t assume you’ve “seen this movie before”, it leads to overconfidence. You need to be humble enough to revisit your thesis as things change, don’t get boxed into a corner ranting against a particular narrative. And finally that the stockmarket is always driven by a surprisingly small number of stocks (the FAANG dominance is an extreme example of this, but it’s always been true to some extent), one of the reasons stockpicking is hard.
Aswath Damodaran runs a regular valuation model on the FAANGM stocks, which he updates to February 2022 in this video, which is well worth a watch. The short takeaway is that he finds Amazon and Facebook undervalued today.
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