Captain Fangtastic seems indestructible

The four fangs: Facebook, Amazon, Netflix and Google have done it again. Is there an end in sight?

Article updated: 27 April 2018 2:00pm Author: Michael Baxter

Word to the wise. I gather Disney will be introducing another Marvel character to the cinema soon: Captain Marvel ‐ a female superhero to be played by Brie Larson.

But there is another marvel that is occupying the markets at the moment, the latest results from the so‐called FANGs: Facebook, Amazon, Netflix and Google. Of course, the acronym doesn’t quite work, as these days Google is known as Alphabet.

You can sum the latest results up in one word ‐ up.

In the latest quarter, revenue rose 49 per cent at Facebook, hitting $11.97 billion, by 43 per cent at Amazon to $51 billion, by 40 per cent at Netflix to $3.7 billion and by 26 per cent to $31 billion at Alphabet. So that’s a combined revenue of $2 billion shy of $100 billion.

Profits rose 63 per cent at Facebook to $5 billion, by 125 per cent at Amazon to $1.6 billion, by 62 per cent at Netflix to $290 million and by 73 per cent at Alphabet to $9.4 billion.

The four companies are now collectively worth just over $2 trillion.

As I write, none of the four company’s shares are at all‐time highs. Netflix is the closest, shares at $314 from the highest ever price, $334, ten days or so ago. Facebook and Alphabet peaked in January, with shares around 15 per cent or so down on fears their business models are hitting a privacy hurdle, partly in the shape of GDPR ‐ a new EU set of regulations concerning privacy ‐ and a public backlash. Amazon shares peaked in March.

Facebook and Alphabet have PE ratios in the mid‐20s, Netflix at 187 and Amazon at 332.

Challenges
They each have challenges. Alphabet saw a big jump in capital expenditure in the last quarter.
Facebook’s results related to a period before the Cambridge Analytica debacle began to unravel. Netflix is burning through cash at an extraordinary rate ‐ around $2 billion in 2017.
Amazon’s profits to turnover may have been improving but the ratio may look excessive to some.


Overhyped
I found it quite telling that I was unable to find a single media account that reported Netflix’s latest profits.
Have they forgotten that to justify their valuations eventually, the FANGs need to start making a profit and then, wait for it, I am going to say something shocking, start paying dividends. Will they ever pay sufficient dividends to justify current valuations?


Strengths
It is quite possible that they won’t all manage it, but I suspect that on aggregate, the current market cap of the four FANGs will be more than justified.


One or maybe two may fall by the wayside, I guess Facebook is the favourite to achieve that, at the moment, but really, at this stage, I don’t know which one of the FANGs is less likely to manage it.


Amazon is playing a canny game. It has now signed up 100 million customers to Amazon Prime, offering free delivery, a Netflix style package, some books and magazines. The fee is £79 a year.


This, alongside the cloud services, is where the profits will come from. It is reportedly investing $1billion in a new Lord of the Rings TV series as an added incentive to would be subscribers.


Netflix cash flow has taken a big hit as it is now producing more and more content in‐house. It says that this is cheaper in the long run but involves more up‐front money.

 

In a funny kind of way, Netflix and Facebook have quite opposite advantages. Facebook is a natural monopoly ‐ the appeal of its product is partially a function of how many users it has.


Netflix, by contrast, operates in a market where there is room for several players ‐ it seems customers are willing to pay for multiple TV style services.


Google says it does not face the same kind of privacy issues plaguing Facebook as its key revenue source is Ad Words. You don’t need to have much personal data to know that people who type in certain key words into Google, such as holidays in Barbados, are a good target for certain advertisers, such as tour operators selling holidays to Barbados.


The FANGs may bite off more than they can chew one day, their valuations may one day reach a level that will never be justified.

 

But I don’t think we are there yet.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.