How much of an impact are the FAANGs having on the market?

And is there a logic to their internal divergence?

Earlier in the week Netflix got absolutely trounced. It’s share price fell well over 30%. The immediate cause for a fall in subscribers. But this must be read in light of longer term concerns about competition in the online streaming market. We will get back to this later.

The main question I want to ask (and answer) here is whether the infamous FAANG stocks — an acronym plagued with company name changes since it was coined — are still driving markets. Since the recovery of markets after the 2008 financial crisis, it is no secret that the FAANGs have been pack leaders in the main equities indices.

We can see this by looking at price movements between 2014 and 2020. The chart below shows two FAANG portfolios, one equal-weighted and one weighted by market cap.

Even eyeballing the chart we can see the the markets and FAANGs move together. But the FAANGs perform a lot better than the indices.

Now look at the same data since last year.

In terms of performance, the worm has turned. An equal-weighted FAANG portfolio underperformed the S&P500 and the NASDAQ and a market cap-weighted portfolio underperformed the NASDAQ.

What is harder to determine by simple eyeballing is whether the impact the FAANGs are having on the indices has increased or decreased in recent times. To check this, we have run betas and correlations of the FAANGs stocks on both incides, as well as how they have impacted the two portfolios. We compare how these statistics looked in 2014-2020 to how they looked in the last year.

With the exception of Netflix and Facebook, the FAANGs are impacting markets more in the last year than they were in the period 2014-2020.

How do we interpret this? Well, first of all, the FAANGs taken as a whole are still driving the markets. But when we drill down we see that markets have stopped paying as much attention to Facebook and Netflix. We might say that these two stocks have been deFAANGed.

Why? These two stocks have always been the weakest of the bunch. Google, Amazon, Apple and Microsoft all have solid monopolies — or ‘wide moats’ — in their respective sectors. But there has never been any reason that Netflix could not be subject to competition by new entries into the streaming market. Likewise, Facebook does not have a clear monopoly over targetted advertising.

These differences in business models have been apparent to some observers, myself included, for years. But now that the competition is actually happening, the markets appear to have starting differentiating between the true tech monopolies and the tech companies subject to competition.

Could wily investors have made money trading this by utilising a long monopoly-short competitive trade? You bet.

Is such a trade still attractive? That is hard to saw without doing a bottom-up analysis on the companies in question — especially Netflix and Facebook. Is it worth doing such a bottom-up analysis if you have money to invest? I think so.