The COVID Rally
At the start of 2020, there was no denying the dominance of the FANGAM stocks in US equity markets, but there was a debate about whether they were over priced, at least collectively. For many old-time value investors, the FANGAM stocks had became a symbol of growth and momentum run amok, though a legendary member of this group (Warren Buffet) had invested in one of the companies (Apple Inc. (NASDAQ: AAPL)). Between January 1, 2020 and February 14, 2020, the FANGAM stocks continued to rise more than the rest of the market and they collectively accounted for 16.08% of the market cap of all US equities on February 14, up from the 14.94% at the start of the year. When the crisis hit, there were some value investors who felt that the market correction would be felt disproportionately by this group, given their run-up in the years before. In the graph below, I look at the market capitalization of the FANGAM stocks and the rest of US equities, on a week-to-week basis from February 14, 2020 to August 14, 2020:
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From Strength to Strength
We may lump the FANGAM stocks as a group, but these are different companies in different businesses. In fact, lumping them together as technology companies misses the fact that Netflix is closer to Disney in its business than it is to Microsoft’s software offerings, and Google and Facebook are advertising companies built on very different technology platforms. There are three elements that they do share in common:
1. Cash Machines: Each of these companies has a business or segment that is a cash machine, generating large profits and huge amounts of cash for the company. With Apple, it is the iPhone business that allows it to generate tens of billions in cash flows each year, and with Microsoft Corporation (NASDAQ: MSFT), it is a combination of its legacy products (Office & Windows) and cloud services that plays this role. With Facebook, Inc. (NASDAQ: FB) and Google, their core online advertising businesses not only generate sky high margins, but require very little capital investment to grow. Amazon, until a few years ago, had no segment of equivalent profitability, but AWS (Amazon’s cloud business) is now delivering those cash flows. Netflix remains the weakest of the six companies on this dimension, but even it can count on the subscription revenues from its “sticky” subscriber base for its cash needs.
2. Platform of users/subscribers: The FANGAM stocks also share user bases that are immense, with Facebook leading that numbers game with close to 2.7 billion users, many of whom spend large portions of each day in its ecosystem. Microsoft, Google and Apple all also have more than a billion users apiece, with multiple ways to entangle them. Amazon and Netflix may not be able to match the other four companies on sheer numbers, but each has hundreds of millions of users.
3. Proprietary and Actionable Data: I know that big data is the buzzword of business today, and in the hands of most companies, that big data is of little use, since it is neither exclusive to them, nor the basis for action. What sets the FANMAG companies apart is that they use big data to create value, partly because the data that they collect is proprietary (Facebook from your posts, Amazon/Alexa from your shopping/interactions, Netflix Inc (NASDAQ: NFLX) from your watching habits, Google Alphabet Inc (NASDAQ: GOOGL) from your search history and Apple Inc. (NASDAQ: AAPL) from your device usage). Even Microsoft, a late entrant into big data, has stepped up its game. On top of the data is actionable, since these companies clearly use the data to advance their business models,
