The Winds of Change

The Winds of Change

In case you missed it, The five biggest tech stocks lost nearly $100 billion in value on Friday. It was decidedly not a good day for FANG (Facebood, Amazon/Apple, Netflix, Google) stocks, now called FAAGM, although we prefer AGFAAM (Alphabet/Google, Facebook, Amazon, Apple, Microsoft) – rolls better off the tongue (NOTE: Netflix was left out of the original FANG in the Goldman Sachs report released on Friday, “since its impact on the S&P 500 is still too small). As CNBC noted, “Facebook, Apple,, Alphabet, Microsoft all fell more than 3 percent Friday as investors rotated out of the stocks. The group has been the market’s leaders and is behind about 40 percent of its performance this year… While they may be loved, today’s tech darlings aren’t without potential flaws…During the bubble, the five largest tech names were trading at almost 60 times two-year forward earnings, with the cheapest stock trading at 36 times. Now FAAMG trades at 23 times forward two-year earnings with only one, Amazon, over 30 times.”

Walter Mossberg refers to them as the “Gang of Five.”

What was not said, and attention must be paid: the stock market, especially tech stocks, have been overheated/overvalued for quite some time, and we all do well know that what goes up, must come down. At some point. And as soon as the valuation of a sector – especially tech – at least somewhat begins to right itself, it isn’t long before the word ‘bubble’ is top of mind once again.

What was also not said: since the nascent days of Web 1.0, we have been witnessing the rise of the surveillance state, from which all of the AGFAAM companies have wrested huge financial benefits. Let’s not forget that Google senior management lunched at the White House during the last administration almost on a weekly basis, while the same cannot be said of Google/Alphabet and the current administration. Au contraire. Is it that Silicon Valley is losing its mojo – or just its access? Never good to hold a grudge. Doesn’t pay, as we now may be witnessing.

What to speak of the global geopolitical risks and European governments cracking down on surveillance/tracking and monopolistic practices that are de rigueur for at least some of the Gang.

“We believe low realized volatility can potentially lead people to underestimate the risks inherent in these businesses including cyclical exposure, potential regulations regarding online activity or antitrust concerns or disruption risk as they encroach into each other’s businesses,” the Goldman analysts noted. Yup, they’re nervous – for good reason – and so are investors.

Not that these darlings haven’t done a fair amount of damage in their ascendency to the top of the proverbial heap, not the least of which is stifling innovation. Which they’ve done, as Mossberg notes, not only through their annual buying sprees (“Google bought YouTube, DoubleClick, Android and Nest. Microsoft bought Skype, Nokia and LinkedIn. Facebook bought Instagram, WhatsApp, and Oculus., etc. In nearly every case, these acquisitions — and many more obscure ones — have made the Gang even more powerful and ubiquitous. Can you imagine Google today without Android or YouTube? Can you imagine Apple’s iPhones and iPads without their super-fast custom processors or (for all its flaws) Siri?”) but also via copying and taxes, as in Facebook/Instagram copying Snap’s “stories,” and “for many smaller companies, especially makers of apps, hardware accessories and services, it’s necessary to either pay some form of tax to one of these platform owners or to abide by rules they set and can change at any time. That stifles innovation.”

Monopolies are nothing new: As Mossberg notes, “And I’m aware that, in American capitalism, there’s a long tradition of industries being dominated by a handful of giants for long periods — for example, the “Big Three” carmakers or the three major broadcast TV networks. But, eventually, upstarts (or the government) break such groups up.” But when a literal handful of companies have such an enormous global footprint and tentacles into so many aspects of our lives, it’s quite another matter. The Gang of Five not only have a chokehold on innovation: they’re also collecting tolls for access, influencing/controlling the discourse (The New Censorship: How did Google become the internet’s censor and master manipulator, blocking access to millions of websites?) and emotions (Facebook reveals news feed experiment to control emotions), and even choking commerce: vendors who sell products on Amazon have been doing R&D for the company for years, with Amazon copying those products and selingl them for less. And brick and mortars are closing at an epic pace.

Silicon Valley (and we use this as a generic term for the oligopolistic Gang of Five et al) has held sway for a very long time, thanks in no small part to many forces being in their favor, and that can never go on forever. CNBC sees Friday’s market event as a “little air coming out of the balloon.” It may be a mere blip on the radar. It may be a precursor to the long overdue winds of change. As Mossberg concluded, “Ultimately, I don’t think even a five-company platform oligopoly is good for consumer tech. By its very nature, it handicaps independent companies with new ideas. But it will end one day. I just don’t know when.” All things considered, it may not necessarily be an ill wind blowing. Onward and forward.

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