Meet the ‘Fangs’, the stock to sink your teeth into

    26 May 2018

    They steal your data, and manipulate it for their own ends. They destroy local shops and small companies. They are undermining democracy and wrecked the tax base. No one has quite accused Amazon’s Jeff Bezos or Facebook’s Mark Zuckerberg of eating boiled babies for breakfast, but over the past couple of months just about every other charge has been levelled at them.

    Amid all that, you might imagine their share prices would be tanking, as customers abandoned them in disgust, and people turned off their social media accounts in protest. You would, however, be wrong. The leading tech giants — Facebook, Amazon, Netflix and Google, known collectively as the Fangs — are doing better than ever. And with new industries to conquer, and new technologies on the way, they can get a lot stronger.

    There is no question March and April were months to forget in Silicon Valley. In the wake of the Cambridge Analytica scandal, Zuckerberg was hauled before Congress to explain himself, and came across to most people as arrogant and unrepentant. At the same time, Donald Trump started going after Amazon, with tweets threatening increased regulation, and Google came under attack in Europe, with the EU threatening to break it up at the same time as imposing a turnover tax on all the US tech giants.

    As regulators and tax authorities went after them, stock prices, which had by themselves powered much of the bull market of the past few years, suddenly cratered. The Nasdaq fell sharply through most of March, led by a small group of tech leaders. Amazon lost 5 per cent on the day Trump started tweeting about the business, and lost almost $60 billion in market value in March alone. Facebook went from $190 a share to $150 as the Cambridge scandal unfolded, costing Zuckerberg personally $10 billion in a single week. True, plenty of people saw that as the start of a long overdue correction in tech stocks. With price-earnings ratios that run into the hundreds, and with lavish spending on every new idea they can think of, they are certainly commanding extraordinary prices. Amazon’s share price had risen 60 per cent in a year, making Bezos the richest man in the world. Netflix’s shares had more than doubled over the same period. It would hardly be a huge surprise if they suddenly crashed down to earth.

    In fact, it was nothing more than a wobble. After dropping from 2,700 to 2,300 in April, by the beginning of this month the Fang index had clawed back all of that ground and was climbing steadily every day.

    At the same time, the giants of the industry had nothing but good news to report. Amazon revealed it had gone past 100 million Prime subscribers, locking the equivalent of more than the entire population of Britain into its free delivery and entertainment system even though it had increased the price. Netflix announced blockbuster first quarter results, adding another seven million subscribers and taking the total to 125 million worldwide. Significantly, it has managed gently to increase prices and still keep growing, something many analysts worried was impossible. That alone was enough to send its shares to a record high (and within a whisker of overtaking the mighty Disney). Alphabet, as the parent of Google is now known, last month beat all expectations, with a 20 per cent rise in first quarter revenues and profits to match.

    Even Facebook, the most seriously impacted by scandal, doesn’t look in terrible shape. A Reuters poll of its users this month showed no real change in the numbers logging in. People might say they are worried about privacy, but they very quickly go back to sharing cute kitten videos with friends. In truth, the Fangs can get stronger from here. Here’s why.

    First, there are huge new industries to conquer. The Fangs all have the lucrative financial services industry as a massive target. Amazon is planning a bank account. The others are starting with payment systems, but insurance and investment will surely be next — after all, Facebook knows a lot more about what risks you take than your insurer, and knows how to crunch the data as well.

    Google and Amazon know which new companies are doing well far better than any traditional City fund manager. Healthcare, which accounts for 10 per cent of GDP in most advanced economies, is another target — one reason why Apple put so much energy into launching its pulse- and heartbeat-monitoring watch. And then, of course, there are cars, drones, robotics and AI. The Fang giants have huge stakes in all of those technologies — and are the companies most likely to make a success of them.

    All are making huge strides with voice computing. Alexa, Google Home and Siri are massive, and within a few years it would be no surprise if most homes had some device you could bark at. Voice could be as big a change as the switch from connecting via desktops to mobiles — and we all know how much impact that had.

    Politicians keep talking about regulation and tax clampdowns. But who says they will be successful? For all the criticism, consumers love the Fangs. No one wants to give up Google or Amazon, and only a few people will disconnect from Facebook — they’d miss their friends too much. True, the Fangs took a beating last month. But there are still huge new industries to conquer, and all the threats of regulation may amount to very little in the end. Savvy investors will have bought into the correction, and will buy into the next one as well — because there is still a lot of growth ahead.