“FANGs” has sprung to prominence as an acronym for the four top performing shares of 2015: Facebook; Amazon.com; Netflix; and Google (renamed Alphabet). The share price performance of the companies ranged from plus 34% to plus 134% last year and has also been impressive over earlier periods. But recent market volatility has impacted the technology sector as investors take profits. In light of this it is important to discern the underlying businesses so that we can focus on which of these stocks to buy on the way down.

 

We like Facebook and Google for their dominance positions in digital advertising. Facebook recently announced sales growth of 52% compared to the previous year as it outpaced overall digital advertising growth. In turn digital advertising growth trumped traditional media advertising growth. The underlying drivers for Facebook and Google are video and mobile advertising. Video is a richer version of the banner display advertising which pioneered the digital space in last decade. Video and mobile advertising for smartphones and tablets are becoming more and more important as they have replaced desktop PC usage. Both companies are profitable, with expanding margins, and have operating cash flows that more than cover their investment needs. In other words they have positive free cash flow.

 

US Digital Advertising Revenues

Google and Facebook have locked down the digital advertising space while the remaining players are fighting for scraps.

 

Global advertising agencies consistently rank Google and Facebook at the top of digital spend destinations. Search (Google’s strength) is seen as best for generating sales, while social media (Facebook’s strength) is seen as a platform for building brand recognition and maintaining customer engagement. We will continue to monitor the fast changing landscape of internet-enabled businesses but we feel the strong should get stronger in digital advertising.

Logos 2

This blog has been split into three parts to be released over the coming days. Parts two and three will cover the final two of the four FANGs in more detail.

 

Felix Fok

Portfolio Manager

Disclaimer: This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.