Corporate American Superstars

By: Mitchel Anthony

Facebook, Amazon, Apple, Netflix, and Google (The FAANG) have been the pride of corporate America for many years and have been at the top of the list of most growth portfolios.  Their innovation has changed the world and given America reason to be proud of what capitalism can produce.  Every economic cycle has growth leaders but these great companies have set a standard that will be remembered for decades if not centuries to come.  There are always doubters and those that believe the growth leaders in our economy are somehow cheating or taking advantage of consumers of their products.  We have seen this talk in the past and undoubtedly will see it again.

The political mess in Washington somehow believes that Facebook, Amazon, and Google should be broken up because they have become too big and powerful and as a result are stifling competition.  This has investors concerned and their stock prices have waned as a result.   Apple is suffering from a different type of political problem.  They are caught up in the middle of a trade war that impacts prices for their products.  As a result the growth outlook for the FAANG has clouds on the horizon.

Have the investigations of Facebook produced any factual argument for breaking the company up or introducing new regulations? Is there any reason to believe that the Justice Department’s investigation of Google will change the outlook for their growth? Will the talk about Amazon’s unmatched strength in Internet retailing bring about a breakup of their empire?

Historically the regulatory environment in America has been a friendly environment for innovative technology, healthcare and industrial leaders. In fact America prides itself on being the place that is home to the best innovation in the world.  The recent talk by politicians has some investors fearing that the environment is changing, and the growth path for these great American superstars, has too many obstacles. An historical review of past actions by politicians finds similar behavior throughout many economic cycles. There has actually been more talk of problems than action by politicians or courts to break companies up or introduce overly restrictive regulations. Generally our politicians and government have learned that their intervention has not stimulated competition or innovation.  We have generally found that free market forces do a better job than actions by regulators.

In the late 90s politicians feared that Microsoft had become too big and too strong and was stifling competition.  During the 80s and the 90s Microsoft enjoyed tremendous growth because of its innovation and marketing abilities with computer software.  They were clearly an American superstar.  As a result they were attacked by politicians who proposed legislation to break up Microsoft.  These attacks by politicians may have distracted the company a bit but for the most part did not change the growth path that Microsoft was enjoying. There were other forces that were changing the growth path for Microsoft however. The politicians were unfortunately numb to what was going on with competitive market forces and how competition was keeping the tech industry balanced.  Apple was becoming a strong competitor to Microsoft in the world of PCs and Google was changing the world of internet browsing.  These were areas that Microsoft led for years.  The government foolishly ordered the breakup of Microsoft in 1998 all while the free market was already balancing itself without the intervention.  Microsoft appealed and the breakup order was reversed years later in 2003.  Microsoft was clearly a stock to sell in 1998.  Not because it was under attack by regulators but because it was under attack by the likes of Apple and Google.

When we look at Amazon, Google, and Facebook we need to look at them in the same perspective that we looked at Microsoft in the late 90s.  The regulatory threat does not concern us as history has proven this type of threat has not been obstructive to innovative growth.  What we must look for is the challenges that these great names have from competitors who would like to eat their lunch and invade their space with better products.  Google clearly dominates search and has a wide economic moat protecting it.  However, Amazon is becoming a credible threat to search and many people begin their searches on Amazon rather than Google.  This is a great balancing act and will drive each other to innovate and strive for better search capabilities.

Facebook is a clear leader in social networking but there are other players in the game that hope to gain market share.  Facebook is enjoying a wide economic moat.  Facebook’s threat currently is not about a breakup from the government or about a competitor getting across there moat.  It would seem to be more about possible government regulation inhibiting their ability to monetize their platform.  Thus far the investigation of Facebook has not found any unlawful invasion of privacy by Facebook.  Facebook generally wants its customers to allow them to share information that customers place on the Facebook platform in exchange for free use of the platform.  There is nothing unlawful about this practice and it is disclosed by Facebook to consumers when they sign up to use the platform.  This type of sharing arrangement has become common in corporate America for years and American regulators have not moved to stifle this type of business.  It is highly unlikely that regulators will work to bring regulations to prohibit this lawful type of behavior that has existed for years. Quite frankly everyone is benefiting from what Facebook does.  Marketing on Facebook is much more efficient than any other platform because it allows you to market to people who have already shown interest in your product or your service.  Consumers get free use of this social network and at the same time advertisers enjoy a much more productive use of their marketing spend.

Google’s domination of search resulted in some fines by European regulatory bodies who believed they inappropriately used algorithms that drove people to results that benefited Google.  American Justice Department review came to a different conclusion and Google has not been fined in America for that type of behavior. Has Google lost its way and have they become fat and overconfident and as a result is the growth path ahead questionable.  We believe the answer to that is simply NO.

The outlook for Amazon is bright and there growth thesis remains intact.  The distaste for Amazon from politicians seems more rooted in dislike for billionaires than real competitive problems Amazon produces for competition.

Apple and Netflix are not included in many conversations about being too big or too powerful and in need of regulation or breakup.  Apple does not dominate the world of PCs or laptops or phones.  It does however dominate the product of choice for people who want the best there is in a PC, laptop, or phone. Quite frankly it would be silly to think of breaking up Apple only because they make the best product.

Apple’s problems relate more to what is happening with the trade war and how tariffs are playing out on prices for their products.  Undoubtedly if this trade war were to persist for years Apple and others in the same position will suffer and their growth path will be affected. This is clearly possible as the Chinese are stubborn negotiators and Mr. Trump likewise has shown tendencies to dig his heels in for things he believes strongly about.  It would seem however that Mr. Trump will seek a deal similar to what was struck with Mexico and allow these tariffs to be removed.  The end of the trade war has tremendous upside for these names but also will hang over them and their upside until the horizon has cleared.  One must ask are their better names to own while this game is played out? We are clearly on the search and would love to find an American superstar that has tailwinds instead of headwinds.  Thus far we have had more discards to throw in the pile then exciting names to add to the portfolio.

We have added Visa, Dell, and Nvidia to the portfolio this year with mixed results.  We are currently looking at Disney and a handful of other Industrial and Consumer product names that appear to have tailwinds at their back.  Generally we do not buy individual names unless they are superstars with great secular growth themes behind them.  We prefer to invest in other less dominant names through exchange traded funds. If the difficult trade environment shows signs of persisting we will likely reduce some holdings in the FAANG and increase our holdings in other names or move toward broader ownership in tech, healthcare, and industrial sectors through exchange traded funds.

We remain optimistic!