26 Jun 2018
Behemoths of the global equity markets, the FAANGs – Facebook, Apple, Amazon, Netflix and Google – have a collective market capitalisation of more than $3 trillion (£2.3 trillion).
Not only have the companies changed our everyday lives, these tech giants are often cited as the primary cause of the collapse of many ‘old economy’ businesses.
However, there are striking differences between the FAANGs when looking under the bonnet of the companies.
It is important to remember each FAANG is, ultimately, a unique business. While all five companies have seen exponential share price growth, there are vast differences between the business models and growth drivers.
Because of these variances, the investment cases for the FAANGs are mixed – and the future is not universally bright. Following Warren Buffett’s famous classification of ‘the great, the good and the gruesome’, we take a closer look at today’s top tech disruptors.
Facebook has 2.2 billion monthly active users, which equates to 30% of the world’s population.
Digital advertising spend continues to grow, with Facebook’s engaged user base ensuring it attracts a high proportion of this. In its most recent quarterly results, advertising sales rose 49% year-on-year, suggesting the digital advertising train continues to gather steam.
At the same time, Facebook has several revenue levers it has yet to pull.
These include e-commerce, payments and media streaming – all of which it has the existing infrastructure for.
Further, Facebook has yet to monetise core assets, including WhatsApp and Instagram.
Google’s success centres on its leading artificial intelligence capabilities.
Google’s leadership in this area is partly driven by the unprecedented amount of data it has collected – which would be almost impossible for a new entrant to replicate – and partly due to the significant investments in R&D they have made.
It remains the dominant search engine across all platforms, meaning it will remain a structural winner in digital advertising.
In addition, Google also has a significant suite of products witnessing accelerating growth, including Google Pay and the Google public cloud.
Looking ahead, its Waymo division is making significant strides in developing driverless technology.
Amazon is notorious among investors for its high price-to-earnings multiple.
Yet, we believe this is justified. Amazon’s valuation is distorted by its high R&D spend - which has helped to establish it as a leader in multiple markets, with many significant future growth avenues.
Amazon has built a market-dominating e-commerce infrastructure, supporting unprecedented delivery times.
With the switch from physical to online retail still in its early stages, Amazon is poised to take significant share of a growing market.
Amazon is similarly dominant in cloud services through AWS, while its Prime membership programme is supporting a loyal, high margin customer base.
The acquisition of Whole Foods, the creation and refinement of Amazon Alexa and its investment in digital media all point to future growth avenues.
The story for Netflix is less clear cut.
It has successfully shaken traditional media companies with its pioneering direct-to-consumer streaming service, which has attracted a large paying audience.
This revenue, in turn, has supported investment into its content offering and it is now market-leading in terms of its content volumes – which is boosting future growth.
However, the space is rapidly attracting large competitors with significant scale and strong intellectual property, including Disney and the other FAANGs.
We believe the ongoing investment in content required to continue powering user growth, as well as fight emerging competition, will cap long-term profitability. Companies need to grow, and we also need them to grow profitably.
On the surface, things are looking rosy at the zeitgeist-forming technology manufacturer, which is within touching distance of becoming the first $1 trillion company.
Services are a growing part of Apple’s revenues and some analysts suggest offerings such as the iCloud and Apple TV could keep consumers tied to the Apple ecosystem, creating a moat around revenues.
Despite this, hardware remains the dominant source of revenue at Apple, with the iPhone alone accounting for 60% of revenue in 2017.
However, Apple’s competitors – such as Huawei, Google and Samsung – have all made significant phone improvements, eating into both Apple’s reputation for innovation and its market share.
For example, the Google Pixel 2 is widely considered to have a better camera than the iPhone X, while in 2014 Samsung introduced the first mainstream iteration of an edge-to-edge screen – not introduced by Apple until the iPhone X.
This leaves questions over the durability of Apple’s dominant market share and its ability to sustain prices significantly above the market average. With this in mind, future growth expectations may be too optimistic.
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