Why aren’t we Facebook friends?

Unlike many, we don’t have holdings in Facebook, Amazon, Netflix or Google – the so-called FANGs. It’s not that we don’t see their merits: we like our YouTube clips and Prime deliveries as much as anyone. But as contrarian investors, we’re looking for the best balance of risk and reward we can find.

We don’t see that balance in the FANGs. As at the end of March 2018, shares in Facebook and Amazon cost more than 5 times as much as they did five years previously. You’d need to pay 11 times more for Netflix shares than in 2013, and even Google costs over 2.5 times more.
So why have the FANGs continued to do so well? It’s simply human nature to assume that what has worked in the past will keep on working forever (and what has languished will continue to underperform). So, to a certain extent, the FANGs’ strong performance has created its own momentum. And there’s also a powerful fear of missing out: witness the rise and fall of Bitcoin.

A top-down factor has been at work too. Since the 2008 crisis, quantitative easing has resulted in a huge amount of money sloshing around the financial system. This has prompted investors to pile into tech-related investments in the hope that some will be long-term winners. Some of this speculation has been remarkably ill founded – as the recent Theranos scandal shows. Led by a charismatic and youthful founder the promise of a revolutionary new technology fell flat when it was discovered that scientific doubts, which had previously been ignored, were indeed well founded.

So far, the FANGs have benefited from operating in largely unregulated territory but nothing escapes regulatory attention indefinitely. We think investors have underappreciated this risk. Today, regulation of online media is very much on the political radar. There is a concerted effort to reduce the power of ‘big tech’, whether through stricter privacy regulations or tougher tax regimes.

The consequences could range from disrupted business models to jaw-dropping fines. Because of the Cambridge Analytica debacle, Facebook is facing investigation by the US Federal Trade Commission. Google is also in the regulators’ sights, receiving a €2.4 billion fine from the European Commission in September.

Some are asking whether behemoths such as Amazon should be broken up. FANG proponents often cite the ‘network effect’ – i.e. being the only game in town and having massive scale. But monopolies are always regulated and the value ascribed to these companies may now look less certain.

The public may also become disenchanted with social media as they become less willing to share their data. Ironically, the hashtag #deletefacebook is now trending on Twitter.

An exodus of advertisers is another risk. We have already seen Mozilla pulling its ads from Facebook following the Cambridge Analytica revelations. Advertisers are worried about risks to their brands from association with the parent companies and some are increasingly sceptical of pay-per-click business models.

Some of these threats may prove to be transient. But as contrarians, we like to be thoroughly aware of potential risks when considering an investment. The dangers facing businesses beloved by the market can be just as underappreciated as the opportunities for companies that are out of favour.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this promotion should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.