Are the FAANG stocks starting to diverge?
Abraham George Market Musings
Volatility marred the markets much of the past week especially in the FAANG class of stocks. It was such a roller coaster ride in the FAANG stocks that I can’t remember any other time where I saw such divergent performance.
It all started with Netflix releasing their fourth-quarter results early in the week. They missed the analysts’ target expectations and prices were knocked down more than 20% in no time with them losing more than $50 bln in market cap. Though it recovered, the stock is still down about 39% from its all-time high. Most analysts are negative on Netflix from a long-term perspective but there is one very successful fund manager who sees value in Netflix: Bill Ackman.
Bill Ackman runs Perishing Square Holdings. In the recent fall, he scooped up more than 3 mln Netflix shares for a total value of over a billion dollars. Obviously, he is seeing something good for Netflix when others are not seeing it. He is such a maverick investor/trader that during the pandemic crisis in March 2020, he turned $27 mln into $2.6 bln in a matter of weeks. I think it is one of the greatest trades of all time. He piled into options strategies on the S&P 500 index as prices were cratering. He had full confidence and faith that the Fed and the government will come to the market’s rescue. He was fully rewarded in a very short time. Very soon after that, he spent $177 mln on options tied to treasury bonds that would pay off if interest rates rose significantly over the next 18 months. By late Mar 21, the investment had more than tripled in value.
By September, concerns about inflation were gripping Wall Street and the position just kept on rising. Very soon, the Fed announced that they could move towards making their first hike in rates in a string of many after a long time by March 2022. But Ackman has already made his money and has cashed out a cool $1.25 bln. Think it is part of that he has plowed into taking a stake in Netflix.
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Next to Warren Buffett, Ackman features more regularly in The Wall Street Journal than any other fund manager. He is brash, flamboyant, very outspoken and a great tennis enthusiast. His returns to his shareholders in 2020 were around 85%. For a very successful fund manager, he is fairly young too. Let me caution you: if you are looking for a smooth equity curve in your returns, Pershing Square Holdings is not where you want to be invested in and neither am I sure if he is accepting new money.
The biggest shocker in earnings announcement came from Meta Platforms (FB) which owns Facebook, Messenger, Instagram, WhatsApp, and Oculus. The stock got hammered and lost a third of its value since it hit an all-time high in September 2021. Fourth-quarter revenues and earnings missed analysts’ expectations, as did revenue guidance for the first quarter of this year.
A major headwind that is spooking investors is the company’s huge investment in the metaverse, which only generated $2.3 bln in revenue last year yet accounted for $10.2 bln in operating losses. The media is not very kind to Meta and to Zuckerberg. It is worth reading the article in New York Times titled, “How Facebook is Morphing into Meta”.
Meta employs over 68,000 people worldwide and it is a very big bet that Zuckerberg has taken in directing his company towards being the leader in metaverse technology. It has created thousands of new jobs that make hardware and software for the metaverse. The company has poached metaverse engineers from rivals including Microsoft and Apple.
This move amounts to some of the most drastic changes at the Silicon Valley company since 2012 when Zuckerberg announced that Facebook had to shift its social network away from desktop computers to mobile devices. The company restructured focusing on making mobile-friendly versions of its products. That move was very successful and lead to years of growth at Facebook.
Apple’s recent move on consumer privacy has clearly hurt Meta and will continue to hurt. So is the ever-growing popularity of Tiktok. But keep in mind that 3.6 bln people - a whopping 61% of all people 15 and older on the earth - use one of Meta’s services every month. It is up 9% year over year in the fourth quarter. Meta is also involved in major share repurchases.
There are many analysts and fund managers who see this fall in Meta as a great opportunity to buy but with their complete change in thinking on committing so much to new emerging technology many are skeptical too.
Then again it is all about disruptive technology and who makes the first move. The early bird gets the worm. Having said that, it is also a dog eats dog world. We can’t forget how Blackberry and Nokia faded away into oblivion with the introduction of the Apple iPhone.
For the past many years, the FAANG stocks plus Microsoft contributed much to the S&P 500 and NASDAQ returns. With last week’s earnings report, I think we are clearly seeing signs of early cracks. The numbers speak for themselves. As someone posted on Twitter, Apple increased $200 bln, Google increased $160 bln, Amazon increased $190 bln, Facebook dropped $238 bln and Netflix dropped $50 bio - all in market value.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.