Currently, FAANMG (Meta [formerly Facebook], Apple, Amazon, Netflix, Microsoft, and Alphabet [formerly Google]) indeed find themselves at an important crossroads, which is also reflected in the fact that the individual-company performances within the group continue to diverge. Overall, however, their problems seem largely self-inflicted. Higher capital expenditure at a time when revenue growth is slowing, combined with external factors challenging the business model, resulted in a reduced ability to generate free cash flow.
At this point, it is worth taking a step back and looking at the unprecedented rise of the FAANMG in the last decade. At the beginning of 2013, the group combined had a market capitalisation of slightly above USD 1 trillion and accounted for roughly 7% of the S&P 500 Index. Fast-forward to the end of last year and the group totalled an aggregate market capitalisation of slightly above USD 10 trillion, which means a tenfold increase.
Furthermore, the FAANMG at that time represented a 23% share of the S&P 500 Index. The peak in market share, at 25.5%, occurred in late summer 2020. To put it differently, while the FAANMG achieved an astonishing 450% cumulative return between the beginning of 2013 and 4 November 2022, the S&P 500 Index excluding the group was only up 125% over the same period. The exponential value creation of the FAANMG over the last decade, as well as the substantial dominance over the S&P 500 Index, even prompted some investors to treat them as a separate asset class.
If historical evidence is anything to go by, the winners of the past decade are unlikely to be the winners of the current decade. Admittedly, this judgement is highly simplified and does not apply unconditionally to the entire collective. What still unifies the FAANMG, however, is the urgent need to focus on spiralling costs in order to maintain their relevance as building blocks in portfolios.
Unless the current profitability trend reverses significantly, the group is unlikely to regain market leadership, which would force investors to rethink their role in portfolios. In that sense, the face of FAANMG is changing. The business models of some of the members are under serious pressure and raise questions about their future viability as we enter the next phase of the information age.
Other FAANMG members are likely to succeed in transforming themselves from growth engines to mature quality businesses. Those that successfully manage this transition will continue to have their place in investors’ portfolios.
New equity leadership themes
In the last decade, breakthrough innovations have revolved around the digital world and the manipulation of digits therein, paving the way for the rise of highly competitive companies whose business models are centred around e-commerce, social media, online streaming, and cloud computing.
As we enter the next stage of the ‘information age’, the equity market leadership will shift as well. We believe that we are now transitioning from the manipulation of digits to the manipulation of atoms. What do we mean by this? Fundamentally, we like the idea that technology penetrates the real/physical world as opposed to only being present in the digital space.
The resulting manipulation of atoms provides for a broad spectrum of emerging investment themes, including the shrinkage of factories and the atrophy of supply chains, the spread of robotics and automation, alternative energy and transport platforms, disintermediation facilitated by the blockchain technology, disruptions in the life sciences space as technology and healthcare merge, as well as applications to improve energy and resource efficiency.
Granted, 2022 was a tough year for thematic equities. However, we believe that while growth prospects have been reassessed and repriced accordingly, the underlying long-term trends remain firmly in place. While there are few universal investment truths, long-term value creation seems fairly elusive when investment portfolios lack exposure to disruptive innovation.