Is it time to ditch the FAANGs? Should investors look for a new set of companies: the TANDs? I think it is time to look further forward that that.
FAANGs and TANDs aren't the answer, look towards a new, new world
Shares in the FANGS (which formerly included Apple, and so was FAANGs) — Facebook, Amazon, Netflix and Alphabet— have had a torrid time in recent weeks. This is leading some to push the TANDs — Tesla, Activision, Nvidia and Disney. The fortunes of this quartet have been mixed. But while I don’t see anything wrong with these companies, in fact I rather like them all, I am not sure they represent the next phase in the tech cycle.
Of course, you can question whether all these companies are techs? Is Netfix a tech? Is Disney a tech? Well, I suppose Disney is trying to be more like Netfix, so if you think the former is a tech, then I guess you could say the latter is.
The reality, though, is that tech is underpinning most of the economy today. I am not so sure that Netflix or Disney are any more techs than the BBC.
As it happens, I am a Tesla fan — but largely because of its B2B potential. I think its expertise in lithium ion and AI is what makes this company interesting. It seems that Elon Musk passed his big test in the last quarter, hitting production targets and with the company turning in a nice profit. Some people seem to want Tesla to fail — and look for reasons to talk it down; the latest argument is that Tesla hit production targets by taking short cuts, lowering quality control. Well, we will see, but I think critics underestimate the value of its expertise in those two critical areas I refer to above.
Activision is as old as the computer games industry. It was an industry heavyweight back in the early 1980s. Shares are up 100-fold since its flotation in the early 1990s— although it experienced hard times before that. Market cap is $41 billion, PE ratio 73. The thing about computer and video games — and I speak as someone who worked in the business for ten years during its early years — is that its popularity relates to the potential created by hardware. In the 1980s, when computers like the ZX Spectrum had 48 kilobytes of memory, games had primitive graphics and poor sound. As hardware became more powerful, games became more realistic and more immersive. That is why the industry has grown so much. Virtual and Augmented reality are at their early stages; as they advance, computer games will become more popular than they are at present. Activision is well placed.
Nvidia is in the chip business, particularly known for its graphics processing units. I don’t dislike the company –– as Moore’s Law comes to an end, specialist chips will become more popular. What makes the company especially interesting is its recent advances in AI and deep learning. Now that really does represent potential.
As for Disney, I have waxed lyrical about the company before, my view has not changed. As the late Stan Lee’s character Spider-Man Said: “With great power comes great responsibility.” And Disney’s power in Hollywood gives it responsibility to shareholders to take on Netflix. I think there is room for both- and a few others besides.
Shares: FANGs versus TANDs
Facebook is down 28 per cent since the summer. Amazon is just down under 20 per cent, but until a few days ago shares, saw a slight pick-up. Netflix is down by around 30 per cent. Alphabet has lost 22 per cent.
Contrast that with the TANDs. Tesla is down 13 per cent since August but is up almost a third since early October. Activision is down by around 40 per cent since early October. Nvidia is down by 40 per cent. Disney shares are a fraction short of an all-time high.
So, actually, the TANDs have not exactly boomed.
From B2C to B2B
But the last ten years or so has seen the big techs (including non-FANG, Apple) home-in on the consumer business. There has been some B2B work — iPads used in business, for example, or Amazon’s success in the Cloud. But it is the consumer who has been truly targeted.
But this has not been so good for the economy. In the developed world, productivity has been awful, and actually, the stock markets have not performed well this century.
But I think that AI, robotics process automation and the Internet of Things are set to transform productivity.
PwC has projected that AI could boost the global economy by $15.7 trillion between now and 2030.
The big winners
I reckon that over the next ten years, the big bucks will go to the companies that help the support AI led revolution.
The old, new world and new, new world
The new world of the first two decades of this millennium was about tech targeted at the consumer — but valuations are now looking stretched, to say the least.
There is a new, new world now. Facebook, Netflix, Disney and Activision sit in the old, new world. Tesla, Nvidia, SalesForce, Microsoft and possibly Apple, Alphabet and Amazon are new, new world companies.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees