What happens when the FAANGs fail?

Friday, 20 July 2018
London, UK
By Sam Volkering

  • Top five equals bottom 282
  • Are they too big to fail…again
  • What is ‘tech’?

When you think ‘tech company’, what comes to mind?

Is it companies like Facebook, Apple, Amazon, Google, Netflix and Microsoft? These companies are now popularly (and annoyingly) known as FAANG stocks.

And there’s a good reason why the FAANG stocks are the epitome of tech stocks…

I saw a retweet from our former Port Phillip Publishing colleague Dan Denning today. His retweet was from ‘The Irrelevant Investor’, Michael Batnick.

Batnick had tweeted the following picture,



chart image

Source: Twitter.com
Click to enlarge

That’s most of the FAANG stocks on the right. And then a whole bunch of other companies on the left. However it was the info that Batnick included with this chart was most fascinating.

But first, the Markets…

Markets

Overnight the Dow Jones Industrial Average fell 134.79 points, or 0.53%.

The S&P 500 fell 11.13 points, or 0.40%.

In Europe, the Euro Stoxx 50 index dropped 13.44 points, or 0.39%.

Meanwhile, the FTSE 100 rose 0.10%, and Germany’s DAX dropped 79.65 points, or 0.62%.

In Asian markets, Japan’s Nikkei 225 is down 121.30 points, or 0.53%. China’s CSI 300 is up 1.22%.

In Australia, the S&P/ASX 200 is up 16.60 points, or 0.27%.

On the commodities markets, West Texas Intermediate crude oil is US$69.75 per barrel. Brent crude is US$72.79 per barrel.

Turning to gold, the yellow metal is trading for US$1,223.05 (AU$1,658.15) per troy ounce. Silver is US$15.40 (AU$20.88) per troy ounce.

One bitcoin is worth US$7,420.80.

The Aussie dollar is worth 74 US cents.

Too big to fail part 2

Accompanying that chart was the text,

The market cap of the top 5 S&P 500 companies: $4,095,058,706,432

‘The market cap of the bottom 282 S&P 500 companies: $4,092,769,755,136’

Now this is just the S&P 500. In the US there are more than 4,000 listed companies. And the total marketcap of the S&P 500 is around US$23 trillion.

So those five companies — all ‘FAANG’ stocks — make up around 17.8% of the total S&P 500 marketcap.

That’s huge. Scary huge. And, depending on which side of the investment fence you stand, world-ending huge.

We all know what happens when big, leveraged, overexposed banks get into trouble. Just reference 2008/2009 if you’re not on the same page here.

But what happens if these FAANGs repeat the mistakes of the past?

They’re too big to fail some people say…

Ahem, really?

But they have heaps of cash on their books. There’s no way they could get in trouble.

Well that’s a reasonable point. Apple has US$20 billion in their coffers. And they have ‘short term’ and ‘long term’ investments worth around US$248 billion.

But they do also have around US$213 billion in short and long term debt as well. Not a bad situation. But not entirely as rosy as most people think.

Amazon isn’t exactly as ‘stable’ as you might think either. Yeah, there’s US$20.5 billion in cash. And yeah there’s US$10.8 billion in short and long-term investments.

But they also carry around US$69 billion in short and long term debt. There are other assets to give them a positive net asset position. But that’s still a lot of debt to carry.

Look, the short story here is these giants of tech are still companies. They’re not invincible. They could fail. Remember the days before they even existed? When giant tech companies from the 90s seemed like they’d rule the world.

Some still do, like Microsoft and IBM. But others don’t. That’s the thing with ‘tech’, it always changes. It always progresses, always develops, innovates…and occasionally we get a full-blown revolution.

This isn’t to say I think these FAANGs will fail soon. In fact I’m quite bullish on the tech revolution we’re seeing right now. But what happens if they do? What happens if they lose competitive advantage? What happens if they crash in value, or disappear altogether?

Market disaster, that’s what. If you thought the big banks failing was bad, wait until the FAANGs go bad too.

Now maybe you think everything’s on the brink of calamity. Maybe you think the FAANGs are teetering on the edge of oblivion. If so, then you might want to get your hands on Harry Dent’s new, best-selling book, Zero Hour.

He explains why he thinks markets will implode and gives a detailed timeline of the events that will lead up to what he calls ‘Economic Winter’.

If you haven’t already, you can get your discounted copy of Zero Hour here.

What is a ‘tech’ company?

These FAANGs are all classified as ‘tech’ companies. Facebook is social media and advertising tech. Microsoft is software and cloud tech. Apple is hardware tech. Amazon is ecommerce and cloud tech. And Alphabet (Google) is search and advertising tech.

When you hear about the mainstream covering ‘tech stocks’ this is what they’re referring to.

All massive. All powerful. All tech.

But what really is tech? What makes a tech company? Theoretically isn’t every company a ‘tech’ company? Should we really place such adoration on these FAANGs? Or is our focus distracted?

The lines between the industry of yesterday and the ‘tech’ industry of today is blurring.

I’ve been researching revolutionary tech companies longer than I can remember. Personally I’ve been interested in them since I was a kid. Professionally it’s been at least a decade now of research.

And even in my short professional tenure the very definition of a ‘tech’ company has changed. I’m not just talking about a minor change either.

The world is in the midst of an incredible technological change. Where the concept of something like artificial intelligence is commonplace in almost any industry you can think of.

We’re seeing non-tech companies explore, research, innovate with game changing tech. A decade ago these would be seen as insane. This change has ramped up in the last five years though.

For example one of our favourite stocks (just kidding, I hate it as a stock), Tesla Inc. [NASDAQ:TSLA], was bumbling along just five years ago. They had only just started producing their flagship Model S and the stock was languishing at around US$30.

They were a burgeoning electric car company.

As the company brought in swathes of debt (as well) the company began to expand.

They started building a gigafactory to make batteries. They acquired a solar company (Solar City). They began to make home battery storage, and solar roof tiles. They deployed automated driving in their cars. They spent money on new energy sources and artificial intelligence.

Tesla wasn’t, and isn’t, just a car company. They’re an energy company too. They’re a tech company.

Or how about energy giant, Royal Dutch Shell [LON:RDSB]. Now, at first, you’d think they’re one big oil company. And on the face of it you’re right. But they also invest heavily in tech.

They have divisions devoted to applying 3D printing, robotics, artificial intelligence and the Internet of Things into their business. And even earlier this year they took a stake in London-based Applied Blockchain. They want to explore how they can apply blockchain tech through their business.

Add in Shell’s push into renewable energy development and you must ask the same question…is Shell also a tech company?

We are heading to a world where AI is ubiquitous, where crypto isn’t a dirty word, and the world and its data is exponentially connected. In this new world every company is a tech company.

The trick is to separate out the best from the norm. Separate ones that are revolutionary tech, from just normal ‘tech’.

These might be the ones to dethrone the FAANGs or maybe even put them out of business. We used to think Blockbuster was a big company until Netflix killed them.

What’s going to kill the FAANGS? Is it blockchain-based pioneers? Crypto projects? Is it the smallest microcap and small cap tech pioneers on markets around the world?

Wherever they are (and they’re out there) we’ll find them. And when we do you can be sure you’ll be the first to find out.

But take this as a warning, don’t place blind faith in the FAANGs, they might not end up being the god-like companies the mainstream might suggest. In our view there’s a new wave of mavens and pioneers coming and it’s going to shake up the FAANGs and the world’s markets.

Regards,
Sam