The recent woes for technology companies, why not all growth stocks are created equally and what will be the FAANGS of the future were the topics discussed at ETF Stream’s recent webinar with GraniteShares.
The webinar, titled FAANGS in focus: Outlook for big tech, started by assessing how the current market environment has impacted tech stocks in recent months.
William Rhind, CEO and founder of GraniteShares, said markets have been getting to grips with overarching themes such as inflation, made worse by the Russia and Ukraine conflict and subsequent rising interest rates.
As a result, the S&P 500 is 9% down in the month to May 18 while the tech-focused Nasdaq is down 12% over the same period.
“The raising of interest rates and the anticipation of higher rates has caused a lot of problems for the stock market,” Rhind said. “Markets are getting to grips with a higher inflationary and higher interest rate environment.”
Do not give up on growth
Despite this, Rhind pointed to the recent inflows into Cathie Wood’s flagship Ark Innovation ETF (ARKK) – despite its recent dismal performances – as a sign investors have not given up on growth.
“It tells you that people are still ready to buy the dip and that people haven't given up on innovation or growth,” he continued. “If you look at the broader market, names such as Robin Hood, which has been hugely beaten up since its IPO but you have an activist investor willing to step in and buy it. There is talk of this happening with another darling of the pandemic, Peloton.”
Laura Hoy, equity analyst at Hargreaves Lansdown, added while growth has ultimately fallen out of favour in the past months, there has still been a strong performance divergence between stocks.
“We have seen not all tech is created equally with performance based on what their long-term profits look like and how well they can manage current market conditions,” she said.
Meanwhile, Paul Cuatrecasas, founder and CEO of Aquaa Partners, said most of the mega-cap tech companies are generating so much cash flow, they can attract everything they want.
“They can attract the right talent, the right commercial partners, commercial partners and they can acquire companies that they need to, whenever they need to acquire them,” he stressed. “These companies are not only generating multiple billions of free cash flow but have some of the best corporate governance and management teams, technology and intelligence in the world.”
Rhind said it is some of the reasons why investors are so drawn to these companies, adding “people were willing to pay a huge premium for growth in a market which was where growth was difficult to come by”.
Furthermore, he questioned the validity of the recent outperformance of value which has been driven by one sector in particular, energy.
“The argument that value is coming back is a tough one,” he said. “When you dissect the performance even further, it is just one sector. Banks have underperformed and consumer staples underperformed. It has been an energy story.”
The S&P 500 Value index has returned -0.8% over a one-year period versus -4.3% of the S&P 500.
Power of the index
Rhind noted the power index construction when thinking about large-cap tech stocks, stressing broad-based technology indices can include companies that may come as a surprise to investors.
“Tesla did not come into the S&P 500 until after it had made a lot of gains for investors,” he said. “If you are looking to invest in more speculative tech stock names, you might not find it in a broad market ETFs.
“We have a pure-play suite of FANG ETPs because we were frustrated with the plethora of thematic ETFs in the market that were marketed as being one thing but ended up being something completely different.”
A McKinsey and Company study titled, Active agility: the five avenues of success, predicted by 75% of the companies in the S&P 500 will have disappeared by 2027.
FAANGs of the future
With some of the mega-cap technology stocks losing value over the past couple of months, the webinar also touched upon whether disruption could create some new FAANGS of the future.
Rhind said we are seeing the evolution of the current FAANG makeup right before us, pointing to recent troubles with Netflix.
He said: “Netflix is finding out other people want to stream as well and there is going to be serious competition in that market. A few years ago, people thought Netflix was a monopolistic player but now they seem a bit more vulnerable.”
Echoing his views, Hoy added: “As we look at who is going to disrupt and what the future of the streaming space is going to be, it might not just be traditional streaming as we see it today.
“It could be more of an amalgamation of short-form videos or even interactive videos in the metaverse. There is still a tonne of space for disruption.”
When it comes to choosing which of the current FAANGs will be successful in the future, Cuatrecasas said it is the companies that are best able to reinvent themselves into new businesses.
“Apple has done that several times. It has done an amazing job transitioning from Steve Jobs to Tim Cook which most people did not expect. They have maintained the legacy and the growth, and managed to increase it,” he said.
“Netflix has not managed to reinvent itself yet. It did so several years ago as a media company when it used to compete against Blockbuster. At the time, it was operating more like a tech company and killed it off.”
To watch the full webinar, click here.