Saturday, January 23, 2016

The Fang Playbook

Jim Cramer, who coined the “FANG” acronym as a descriptor for the high-flying Facebook, Amazon,Netflix, and Google group of tech stocks that have dramatically outperformed the market, made clear yesterday that his endorsement wasn’t necessarily connected to the underlying companies:
A note on these stocks. I picked them largely because over the years they have become anointed by a group of go-go managers, meaning managers who like to be affiliated with the stocks of companies with the most momentum. I by no means have said “buy these stocks” because they represent great value. What I have been saying is that because of the scarcity of actual high-growth stocks these have become default names that managers naturally gravitate to.
It’s not an unreasonable position: the demand for growth in a low-interest-rate environment flooded with capital, plus a healthy dose of FOMO (Fear of Missing Out) has certainly played a role in the rise of unicorns; it makes sense that the same dynamics would play out in the stock market as well. It’s also a position that has had the good fortune of being right: in 2015 the FANG group accounted for more than the entire return of the S&P 500.

In fact, though, Cramer was more right than he apparently knows: the performance of the FANG group is entirely justified because of the underlying companies, or, to be more precise, because the underlying companies are following the exact same playbook. Sometimes the market does get it right.


Each of the FANG companies is in a similar position in their respective industries: they haven’t so much disrupted incumbents as they have subsumed them:

Facebook: The late David Carr, who first broke the news about Facebook’s Instant Articles initiative back in 2014, worried that “media companies would essentially be serfs in a kingdom that Facebook owns.” However, as I noted in The Facebook Reckoning, publishers already are.Facebook’s status as the Internet’s home page means that publishers have no choice but to accommodate themselves to the social network, whether that be Instant Articles or an increased focus on video.

Amazon: While the biggest driver of Amazon’s increased valuation has almost certainly been AWS, the e-commerce side of the business continues to grow like gangbusters as well, taking over half of every additional dollar spent by U.S. consumers online, and a quarter of all retail growth online or off. The vast majority of those sales are actually from 3rd-party merchants using Amazon as a discovery and fulfillment platform, but these merchants’ market power relative to Amazon is not unlike publishers relative to Facebook, because is where the buyers are.

From a certain perspective this paradigm applies to AWS as well: the reason why AWS’s profitability increases along with growth is that Amazon achieves economies of scale, which is another way to say that AWS’s suppliers have no choice but to be squeezed in order to indirectly serve the customers they used to sell to directly

Netflix: The Internet — and Netflix — made fun of an NBC executive who claimed that “The reports of our death have been greatly exaggerated.” Here’s the thing, though: he’s right, in part thanks to Netflix. According to this February 2015 list, 42 past and present NBC shows are streamable on Netflix, for which the latter is certainly paying a material amount. Indeed, perhaps the most fascinating aspect of Netflix’s meteoric rise is the fact that the same content producers who are ultimately threatened in the battle for attention are increasingly unable to stop themselves from selling their content to Netflix: the streaming company has too many customers adding to a pile of content money that is too big to ignore.

Google: Google’s position is similar to Facebook’s: any business that wants to be discovered by potential customers has no choice but to follow the search company’s directives, whether that be cleaning up dubious SEO strategies, making their pages mobile-friendly, or soon, adopting Accelerated Mobile Pages. Every now and then someone, usually a set of publishers, tries to defy the search engine’s influence, only to come crawling back within weeks once traffic craters. The reality is that most people find most web pages through Google, which means Google calls the shots — and sells the most expensive advertising of all.

There is a clear pattern for all four companies: each controls, to varying degrees, the entry point for customers to the category in which they compete. This control of the customer entry point, by extension, gives each company power over the companies actually supplying what each company “sells”, whether that be content, goods, video, or life insurance.

by Ben Thompson, Stratechery |  Read more:
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