De-FANGed: Should Facebook Remain a Part of the Group?

After the privacy abuse scandal, the views among fund managers concerning Facebook's future prospects are markedly different

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May 17, 2018
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For the past decade, analysts frequently used the acronym “FANG” to describe the tech giants that were taking the stock market to new heights. The constituent members of the group, for many, were inseparable: Facebook (FB, Financial), Alphabet's (GOOG, Financial) Google, Amazon (AMZN, Financial) and Netflix (NFLX, Financial). Each of these unique companies represented a disruptive force in their respective industries or consumer market sectors.

All of the companies had their astronomical growth at approximately the same time; during the prolonged bull market, these stocks roared together. In tandem, they helped cause the stock market’s upward trajectory for the past decade. Since these tech giants were responsible, in and of themselves, for driving global market growth, when you mentioned one, all the other members of the group were implicitly included. In short, these new economy behemoths, due to the collective influence, were indistinguishable and inseparable.

However, some fund managers are now ready to buck the trend or practice of including all of the stocks in the same investing basket. Many are beginning to realize the constituent parts of the FANG group have now exhibited more differences than similarities.

For example, even though Amazon is the 800-pound gorilla in the online retail sector, it still derives a significant portion of its revenue from its cloud operations. How does that make it similar to Google or Netflix, whose earnings are derived directly from their respective markets?

Additionally, the FANG stocks no longer exert the same influence over the broader market as they did during the decade-long bull market. According to S&P Dow Jones Indices, at one point in February, both Amazon and Netflix, whose shares are up 22% and 62%, respectively, year to date, accounted for more than 30% of the S&P 500’s 2018 gain. That proportion dropped to approximately 24% as of April 6.

Rob Sharps, head of investments and group chief investment officer for T. Rowe Price Group thinks it may be time to view and analyze these stocks as distinct, unique businesses. “Investors have been trying to lump these stocks all together for years." Sharps further noted that, “There may be some greater differences among the FANG stocks than in the past.”

Some analysts believe the privacy data abuse controversy that has embroiled Facebook has muddied the waters in terms of the relative importance or weight that should be accorded Facebook as a constituent part of the FANG group.

Shortly after the Cambridge Analytica story broke, shares of Facebook dropped precipitously from $185 in mid-March to $152 near the end of that month. Although the stock has recovered its losses, many fund managers still believe regulations are imminent and, over the long term, will ultimately be deleterious to Facebook’s business model, which is entirely based on the manipulation, data harvesting and sale of private information to third parties without users' knowledge or consent.

Brad Slingerlend, portfolio manager of the Janus Henderson Global Technology Fund, started reducing its position in Facebook before the data privacy controversy.

Slingerlend believes the worst is not over for Facebook and notes the range of scenarios for any disruptions to Facebook ‘s core business has widened. Additionally, Zuckerberg’s controlling interest in the company only exacerbates the uncertainties with which fund managers must contend.

Given the prominence of the privacy scandal, it is remarkable how divergent the views are among investment managers on the future prospects of the company.There is no consensus on the direction of Facebook or how the privacy scandal will impair its bottom line.

A perusal of the holdings of some of the gurus clearly bolsters this contention:

Guru Period Bought/Sold (Sh.) % Change Qtr. End Shares Avrg. Price
John Griffin 2017Q4 -1,061,700 Reduce -56.61% 183,700 $176.73
2018Q1 183,700 Sold Out 0 $179.95
Louis Moore Bacon 2017Q4 51,423 Add 5.28% 1,025,000 $176.73
2018Q1 -880,000 Reduce -85.85% 145,000 $179.95
Diamond Hill Capital 2017Q4 -277 Reduce -6.99% 3,019 $176.73
2018Q1 934,996 Add 309,70.39% 938,015 $179.95
First Pacific Advisors 2017Q4 New Holding New Holding 29,300 $176.73
2018Q1 1,993,939 Add 6,805.25% 2,023,239 $179.95
Ray Dalio 2017Q4 -53,569 Reduce -85.26% 9,264 $176.73
2018Q1 195,732 Add 2,112.82% 204,996 $179.95

Some of the percentage changes to select guru’s portfolio positions in Facebook are staggering. This clearly demonstrates the gulf in opinion among these fund managers as to the ability of Facebook to sustain its current earnings growth rates and continue unbridled with its lucrative private user data-dependent business model.

But it isn’t just Facebook that should no longer be included, all the remaining constituent stocks of the FANG group are now developing in ways that highlight their differences more than their similarities. “FANG is not a set of four companies. It’s an idea,” Scott Freeze, chief investment officer of Sabretooth Advisors, said.

Freeze added, “There are FANG stocks every generation, every decade. Nothing stays on top forever.”

Maybe it’s time to break up the band.

Disclosure: I have no positions in any of the securities referenced in this article.