Should we think of big tech stocks as we’ve thought about “tech stocks” up until now? I’m not sure anymore. I don’t think anyone else should be either.
If you told me 10 years ago that Amazon would dominate retail, I’d wholeheartedly agree.
If you told me that it’d dominate one of the fastest-growing segments of B2B revenue and profit — cloud storage and processing — I’d raise an eyebrow, but hear you out.
If you told me that I’d receive an Amazon catalog in the mail, complete with the kind of glossy pics, full-page features, and clean columns that the dinosaurs of retail clung to for years, I’d laugh.
But there I was, saying “no way” Keanu-style to no one in particular, at my mailbox yesterday.
I have to ask — is Amazon a “tech stock” still, at least as far as I should approach it for portfolio allocation?
Are any of the FAANG stocks really growth stocks anymore? Is it time to abandon this entrenched idea that they should be in their own category at all?
It feels akin to the end of the Wild West — is there any frontier anymore?
The market has sent mixed signals for years and I think 2020 sealed the deal. Here’s why…
At the core of our understanding of how things have changed for Big Tech is how people invest in them.
Consider this chart of Amazon versus the Nasdaq, S&P 500, Dow Jones, and Russell 2000 indices:
The reason why I like that chart is it shows that big tech stocks don’t have the same divergence of correlation from more “traditional” companies they once had. You’ll see similar results for Apple, Microsoft, Facebook, and the Alphabet Inc. stocks.
They are stuck in lockstep with the broader market as it is overwhelmingly invested in by mutual funds, institutional funds, and ETFs — which in turn count for a massive amount of daily inflows and outflows.
That shouldn’t be a surprise. Take a look at the top six holdings of the S&P 500 index by weight, which is how investors inevitably have their funds allocated — APPL at 6.43%, MSFT at 5.46%, FB at 2.23%, GOOGL at 1.77%, and GOOG at 1.74%.
Now Tesla is going to be added to that mix too. Even more weight and passive investment going to a company that would have been segregated from the traditional indices just a couple short years ago.
Forget the concept of the S&P 500 being a good way of tracking the broader market. Nearly 18% of it is concentrated in what are essentially four big tech stocks today.
We’re getting a hefty dose of Big Tech from the cheap passive funds in our accounts, whether we like it or not.
Why should we allocate any more of our funds to so-called “growth funds” when a simple passive market index fund already weighs so heavily in favor of stocks we already disproportionately own elsewhere?
I have no defense and I’m changing my allocation accordingly. It’s about time we all did the same.
The writing has been on the wall for years, but it is time to call it how it is. They have changed, the market has changed, and we need to change with it.
Truth be told, I’d LOVE to see these tech stocks broken up. Amazon in particular. I’d love to invest in Amazon’s marketplace and shipping businesses separately from the AWS division.
But the seemingly monolithic block of the FAANG stocks is known more for how they do business even if the businesses themselves are still inscrutable and bloated leviathans.
I’d put Apple, Amazon, and Netflix in one sub-category as mature revenue stocks. Everyone worldwide knows their brand names. They compete for revenue in fully saturated markets, even if they bake in their own market advantages.
Facebook and Google look more and more like traditional print publishers, whether they like it or not. They need eyes to scroll past ads. The business model is functionally no different outside of the cost of content.
That double-dip for free user-generated content to curate algorithms for keyword-driven ad revenue is what is REALLY at the heart of the issues with them that the government is trying to address, as inept as the Feds have been and will be at grasping the concept.
And in that sense, this schism of service and revenue models should be the basis we use to dismantle the concept of FAANG stocks as a block once and for all. We also do ourselves a disservice by considering them on par with the kind of true growth companies they were over the last decade.
As long as these corporate giants are lurking in every core portfolio fund that is easy to access with tax-advantaged accounts there is no reason to single them out.
We’re buying them anyways. I’m going to kill my large-cap “growth” fund allocation. That’s covered and I want funds freed up for REAL growth plays.
Around the end of the year, I rebalance my portfolio, like so many more do. This year I’ll do a bit more than I used to to get my house in order.
As much as these tech stocks have driven gains for my passive holdings, I don’t care for having them bleed over into multiple categories.
We should all take a deeper dive into what we own and ask why. Change is afoot. FAANG is dead. Long live FAANG stocks.
Let’s find better options that drive better growth and profits, stay tuned for a lot more of that.
