Over the past decade, the US tech sector has been the darling of the global stock market. Whilst this sector of the market is made up of a large number of companies, it is dominated by a few massive tech giants, which have come to be known as the FAANG stocks.
These companies are nothing to do with Count Dracula but are rather an acronym of some of the biggest companies in this space, namely Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet). When seeing those names together, it’s no surprise that they’ve been a good place to park your cash over the past ten years!
But recently, there’s been some change in the wind. There has been testimony given to the US Congress, significant concerns around data gathering and privacy and declining user numbers across the board. This change in sentiment is coming across loud and clear in the share prices. They are starting to fall.
But is this just a blip on the radar or the beginning of a new downward trend in the US tech sector?
First, let’s look at why some of these companies are under fire. Obviously, the reasons are going to be slightly different for every company, but broadly speaking, they are becoming more mature. We’ve grown accustomed to seeing massive growth each year from Silicon Valley. Investors expect millions of new users each quarter and record profits on a regular basis.
For a long time, these companies have delivered on this promise. Facebook (Meta) has grown its annual revenue from just over $5b in 2012 to almost $118b in 2022. Over that same period, Amazon has grown its net revenue from $61b to $469b. Even Google, the old-timer in the gang, has grown revenue from $50b to $256b over the past ten years.
The problem is, all businesses that are scaling this fast will eventually run out of low hanging fruit. In the last quarter of 2021, Facebook lost users on their platform for the first time in history, with 500,000 fewer accounts. When this was announced, the share price fell 26% overnight and was down 42% at the time of writing.
Netflix created the streaming market, and it’s now being drowned out by the sheer number of competitors. As a result, Netflix is also starting to bleed subscribers. They lost 200,000 in the first quarter of 2022 and have forecast losing up to two million more in the coming quarter. Unsurprisingly the share price has been impacted heavily by this, and it’s down almost 70% since its high point at the end of 2021.
Every company has its own story, but they all sing to a similar tune. New players have entered the market, it’s harder to add new users, and consumers are becoming savvier about things like privacy, data sharing and advertisements. All in all, it’s not looking like sunshine and rainbows for the Silicon Valley unicorns.
Like anything to do with investing, we can’t be certain. With that said, what we can do is look at the industry and make sure our expectations match reality. Think about it. Back when Facebook was a startup in Zuckerberg’s Harvard dorm room, it was easy for him to double the size of the company each year. If he had 1,000 users, all he had to do was add another 1,000. Piece of cake.
Now, Facebook has 2.91 billion users. Given that there are under 8 billion people in the world, many of whom don’t even have internet access or running water, you can see how it’s pretty tough for a business to continue to grow at the same rate as it gets bigger.
What we’re seeing here is this sector of the market moving out of its growth phase. If you’re expecting to continue to see an investment in the FAANG stocks lead to a doubling, tripling or quadrupling of your investment in a short space of time, you might be disappointed. Once the dust settles over the next couple of years, we’re likely to see FAANG companies play a role in an investment portfolio that more closely matches traditional companies like banks and oil companies rather than garage startups.
As always, though, diversification is the name of the game.
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