The end of July saw the simultaneous release of results from four of the US’s tech titans.
Facebook, Apple, Amazon and Alphabet (formerly known as Google) all came out on Thursday with what were – in the context of the massive contraction in the US and world economy – spectacular second quarter figures, leading the Financial Times’s Lex column in which they were referred to as the ‘Fearsome Foursome.’
It is most unusual for the four to report on the same day. Usually, they would be spread across the week, but all of them were forced to appear before a US Congressional hearing the day before and needed to prepare for that.
The hearing was to address concerns that they’ve become too dominant in their respective industries. The hearing struck some blows, but whether it amounts to anything that will lead to structural break-ups looks unlikely at this stage.
The FT summed it up well when it said the outcome was ‘growing political and regulatory pressure for action, but a shaky legal foundation on which to seriously challenge Big Tech’s dominance.’
Perhaps the most damaging revelation was an internal communication that revealed how Facebook’s Mark Zuckerberg saw acquisitions as an effective way to neutralise potential competitors.
Surely Instagram could have emerged as an alternative platform to Facebook, if Facebook had not bought it – and managed the different age groups between the platforms rather than having them dispersed across rivals.
But this email was one of 1.3 million, and there wasn’t a great deal else in terms of evidence of collusion or anti-competitive practice. As the FT concluded, ‘Big Tech probably doesn’t have too much to fear.’
Are these monopolistic businesses? Do they stifle innovation that would otherwise emerge from new entrants? Or, are they brilliant businesses whose consumers still love them, and which have displaced often second-rate competitors that produce poorer quality products at higher prices.
In truth, there has been ongoing discussion along these lines for several years, but no consensus on what to do has yet emerged.
But the exceptional financial results in difficult circumstances, when many others are struggling, suggest that there may be something in the criticisms.
The arguments are finely balanced. The Democrats may put the heat on further if Joe Biden gets elected, but at the same time there is a case for saying, ‘These are great US companies producing great results – what’s not to like?’
The ‘Fearsome Foursome’, of course, are more commonly referred to as the ‘FAANGs’ (using the term coined by CNBC’s Jim Cramer in 2013, based on the initials of the constituents when Alphabet was still known as Google).
The fifth member of the team, Netflix, reported its Q2 figures two weeks before – and disappointed after guiding to lower subscriber numbers in the third quarter. But Netflix too has benefited from lockdown and produced good investment returns in the year to date as people have subscribed to online entertainment whilst being cooped up at home.
The way this select band of stocks has kept performing over the past decade has been amazing.
During the 1950s, stock market returns were focused around a relatively small group of stocks which became known as the ‘Nifty Fifty’ – many of them still around, including Procter & Gamble, Pepsi, Pfizer, Eli Lilly, Coca Cola, IBM, Wal-Mart and Disney.
But the FAANGs are even more select. What should we call them? The ‘Nifty Five’? Or should that be the ‘Famous Five’?
The one stock that has often been linked with the FAANGs and shown similar returns, but never formally included with them, is Microsoft.
Perhaps that was because it would have disrupted the potency of the acronym ‘FAANG’, although Microsoft was a bit later in demonstrating supernormal stock market returns. ‘MFAANG’, or ‘FAMANG’ doesn’t have quite the same ring to it.
Microsoft reported good figures for Q2, without quite blowing away expectations in the way the ‘Fearsome Foursome’ did.
But perhaps there is good reason for Microsoft not to be part of the FAANG gang, on the basis it is not so much a genuine disrupter and more of an ‘enabler’ – benefiting many other companies, including rivals, in terms of improving productivity, rather than just brushing them aside in the way that the FAANGs have done.
The FAANG gang may have elbowed many existing companies and competitors aside in their rise to prominence and may represent a high water mark in terms of their stock market performance, but it would still be brave, or even dangerous, to bet against them at this stage.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.
