The FAANGs, part two. Is the party over? Hi, my name’s Paul Carroll, I’m the CEO and founder of Efficient Wealth Management. Back in June we sent out a couple of videos discussing how the FAANGs are lifting the market and growth-oriented indexes. And of course, the FAANGs are Facebook, Apple, Amazon, Netflix, and Google.
Rarely has so much money been made by so few stocks and for such a long period of time. It’s really unprecedented. In fact, since 2013 a full 37% of the rise in the S&P 500 were just those five stocks. Less we think it’s a US-only phenomena, in China, 28% of the rise of debt equities in the same period of time, just two stocks, Alibaba and Tencent. And Alibaba of course, is their Amazon but bigger.
Since September, the medium value of these five companies just dropped over 21%. We have seen almost one trillion dollars of shareholder wealth vaporize. Why has this happened? Certainly, reflecting back to our June video, this is no big shock to us. If anything, the shock is how it took so long. Interest rates are up, the subject of a recent video. Two, we’re looking at decelerating growth. Nothing can keep growing at the rate these are, it’s not mathematically possible. In fact, recently it’s been quite a sharp slowdown in that growth.
Falling profit forecasts, one estimate is that the probability of all five companies hitting their profit forecasts is at or below just 14%. There’s a reality check that’s finally hitting the market.
And finally, rising capital intensity. It used to be phenomenal how few assets and people were required to create all this wealth. But to maintain that competitive position, to maintain the desires of society and their demands for a certain amount of accountability, especially on the social platforms, these companies are having to make a huge investment both in talent and in other small businesses to protect their position.
So these four elements have really impacted the value of these companies. There are those who believe they add no value and yet, they’ve added real value. In fact, Amazon, for one, has reduced online inflation, it’s estimated, by as much as 1%. That has helped Middle America enormously. That has created a phenomenal amount of wealth for our society. But economic gravity eventually has to take route.
So the question now is what’s the next source of growth? Who are the next FAANGs? Where are we going to get our next bite of the apple? I personally think the energy sector is ripe for enormous disruption, but also exciting transformation, but that’s a guess. We wish you the best with investing success. Thank you.
“Big Tech’s Sell-Off.” The Economist, The Economist Newspaper, 1 Nov. 2018, www.economist.com/business/2018/11/03/big-techs-sell-off.