FANG stocks — or FAANGs including Apple — have had a hard time over the past month. Two weeks ago the Cambridge Analytica scandal led to speculation about new regulation that could hurt Facebook and this week US president Donald Trump has repeatedly attacked Amazon on Twitter.
The acronym was invented by investor Bob Lang as FANGs in 2013, and made famous by CNBC host Jim Cramer. It groups together Facebook, Amazon, Netflix and Google, and at the time it caught the market mood. All the companies were high growth, large cap stocks outperforming the rest of the US equity markets thanks to investors' belief in their disruptive potential.
Occasionally, Microsoft gets thrown in as well, to create the audibly unpleasant acronym FAANMG. But nonetheless, those who took it as an investment thesis, as well as a neat soundbite, have done well since Lang coined the term.
Index and exchange-traded fund providers jumped on the strategy, with a number of FANG ETFs being launched as late as last year. The result has been that, more than ever, there has been a tendency for these companies to be traded together and for their share prices to move together.
These companies have giant valuations, are hugely liquid and are still growth stocks, so their value to investors wanting to bet on the US and global economies or the continuing shift towards internet use means the group trading of these titanic stocks is unlikely to end soon.
But bundling these stocks together at this point in the cycle makes little sense. In five years of FANGs, these companies have matured, and each faces its own idiosyncratic challenges, separate from broader moves in "tech".
Moreover, as markets become more volatile, asset prices will prove less correlated, and the rising tide will no longer lift all boats.
“People are already starting to try and differentiate between the FANGs. They trade more or less as a group because they are the closest peers to each other,” said an equity syndicate banker. “But there will be a point at which somebody turns around and points out that Amazon’s business, for example, might be performing normally, while Facebook’s model is being challenged. The market needs to start applying a little more discretion about how we look at these stocks in relation to each other.”
As the banker pointed out, the Cambridge Analytica scandal could damage Facebook, but is unlikely to lead to regulation that would damage Amazon.
Equally, if President Trump decides to use the US Postal Service to attack Amazon as a near-monopoly that pays little or no tax, that should have little effect on the day-to-day operations of Netflix, despite Amazon and Netflix competing in video streaming.
“These individual issues will start coming out for some of the companies, issues which won’t be shared by the other FANGs, so we will hopefully see some natural divergence and we might end up losing that phrase, but it hasn’t happened yet,” added the banker.
The latest tech unicorn to join the public markets, Spotify, began trading on Tuesday through a rare direct listing on the NYSE.
Its trading performance should be based on its merits and the market it operates in, not the pressures being faced by loosely grouped “peers”.
Otherwise, the days of the even more unpronounceable FAANMSG might be fast approaching.