PSA Global Strategy: Have We Passed Peak FANG?

The stock market loves a collective. Ever since the "Nifty 50" in the early '70s, groups of winners have been bandied together. In the 1990s, we had the "dot coms", stocks that were supposedly winners from Web 1.0. As that was going on, Japan had its own "Nifty 50" of blue chip export names. In the 2000s, we had the Four Horsemen, a group that has morphed, a decade later, into FANG.
One of the first signs of difficulty with a collective is when the market can't decide on the components. With a list 50 stocks long, that's understandable from the outset, but it is more problematic when it is four or five names. Nintendo (7974 JP) was originally a Four Horseman stock, but was replaced by Google (GOOG US) as its fortunes waned following the release of Wii Music.
FANG was originally named for Facebook (FB US) / Amazon (AMZN US) / Netflix (NFLX US) / Google but first ran into problems when Google changed its name to Alphabet and then when Apple's (AAPL US) star resumed its ascendancy, essentially giving the collective three "A"s and no "G"s. It was then suggested that Netflix should be replaced by Nvidia (NVDA US) the high-flying graphics chip / AI stock, arguing that the software side of Nvidia's business was at least as important as the more visible graphics chip business. Complicating matters further, Microsoft Corp (MSFT US) – previously seen as a relic of the PC era – was making a big comeback with cloud.

Key Points

• While top-line growth was generally good and better-than-expected, operating expenditure (OPEX = CoGS + SGA - Depreciation) in several cases rose sharply.
• As a group, the leading US tech names are trading on over 15x FY18 EV/OP, a valuation that you normally give to a group of large cap blue chip names based on most recent actual results.
• However, this group’s valuations are skewed given companies, like Amazon, eschew profit for market share.
• There is a battle to come in video distribution and pressure on download purchasing. Therefore, winning content rights is becoming more expensive.
• The FANG and FANG-wannabees are increasingly encroaching on each other's turf
• When saturation hits, it is likely to hit hard, particularly when you factor in the global expansion of Chinese internet names.
• Winners, losers and replacement names.