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Beyond FAANGs: who to invest in next?

As fortunes begin to diverge amongst the US tech giants, we think it might be wise to look beyond Facebook, Apple, Amazon, Netflix and Google for large-cap growth opportunities
August 2, 2018

CNBC’s Jim Cramer has a lot to answer for. By bundling together Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google’s parent company, Alphabet (GOOGL) – five of America’s largest and fastest growing companies – into a convenient acronym, he has helped drive a wave of momentum investing, fuelled by expectations that these giants will grow as a pack. It has taken the starkly contrasting fortunes of Facebook and Amazon following their respective half-year results announcements, for the market to remember that the five FAANGs are very different beasts.

Amazon is an online retailer which has disrupted every single established market it has entered. Its expansion has fuelled compound revenue growth of 7 per cent over the past 10 quarters, while annual operating cash inflows climbed from $5.6bn to $18.4bn between 2013 and 2017.

By contrast, Facebook is a free social networking service that relies on revenue from advertising. True, its value as an ad platform has lifted sales from $3.4bn in the first half of 2013 to $25.2bn in the recently reported 2018 first-half results, but as it hovers on the cusp of utility-style regulation and fights declining demand for social media, investors are getting nervous. In July, management cut 2018 expectations prompting the biggest one day share price fall in the tech giant’s history.  

These two companies are joined under the FAANG umbrella by a hardware and software specialist, a search engine owner and a digital media group. As far as their operations are concerned, the FAANG stocks are not that similar, what they do share is an ability to grow faster than most other big companies in the US. But if FAANG really is a symbol for high and fast growth, there are several US stocks that deserve a place in the most coveted of markets before Facebook, Netflix or Alphabet.

Welcome the giants

Take Microsoft (MSFT), for example. Bill Gate’s technology behemoth has shrugged off the regulation that shackled its growth for the first decade of the 21st century by expanding into cloud hosting services. In the second quarter of 2018, revenues from its cloud division rose 53 per cent to $6.9bn (nearly double the revenue generated by Netflix in the same period), to drag overall group sales up 17 per cent to $30.1bn. Microsoft has added $280bn of stock market value in the past year alone, almost twice Netflix’s entire market cap.

Intel’s (INTC) bulk also eclipses that of Netflix. Its data-centric businesses alone made $8bn in the three months to June 2018, up 27 per cent on 2017 and although market cap growth has fallen far short of that achieved by Netflix in 2018, it’s still nearly twice the size. And spare a thought for chip maker Nvidia (NVDA), which recently reported better second-quarter revenue growth than Netflix and boasts a bigger market cap than its media peer.

Growth on several fronts

True, 40 per cent year-on-year revenue growth in the second quarter really shouldn’t be scorned, but Netflix is now facing the uncomfortable task of maintaining momentum. To grow revenues, the group is reliant on signing new subscribers, and with competition hotting up in the media streaming world that task is becoming harder. Netflix nearly doubled its marketing spend in the second quarter and plans to spend $8bn this year on content.

Facebook and, to a certain extent, Alphabet face a similar problem – Facebook makes all its money from marketing, while 87 per cent of Alphabet’s second-quarter revenue came from Google ads. With demand for social media beginning to falter, the former could be in difficulty, while rising regulation could taper the dominance of both ad platforms.

By contrast, Apple’s multiple revenue streams have helped it in periods when iPhone growth has been slow – not a problem in recent quarterly numbers when a big leap in the average price of the iPhone sent revenues up 17 per cent to $53.3bn. Meanwhile, Amazon – “the everything store” – is certainly not reliant on one market.

But these aren’t the only large companies with multiple revenue streams to have reported decent revenue increases in the recent US earnings season. JP Morgan, Johnson & Johnson, Exon Mobile and Visa all enjoyed double-digit revenue growth, while sales at Chevron leapt more than a fifth thanks to lower oil prices and higher production.