Satya Nadella, chief executive officer of Microsoft
As investors look for new acronyms to express investment themes its worth focusing on the fantastic 'FAANG' trade (we add Apple to ours) performance and why its days are numbered.
Investors are correct to be concerned about the future direction of FAANG stocks. After all, together with Microsoft, these companies accounted for 50 percent of the gains for the S&P 500 in 2018, as well leading the recent declines.
Don't wait for FAANG leadership to pick markets up again. There are serious headwinds— rising costs for the business model itself, including significant regulatory scrutiny— facing Facebook and Google. In the other side, positive tailwinds will favor Amazon, Microsoft, and Netflix.
We suggest investors drop the 'F' and 'G' and add 'M'. Consider "MAAN" as the new leadership group in global markets.
As we've written before, in 2018 there is brewing storm over data privacy, i.e. how a company uses your personal data to generate profits. Damage to shareholder value won't be just in the form of rising costs and fines for FB and GOOG, it could eventually lead to significant declines in shareholder value due to customers losing trust in management teams—due to the privacy issue.
Apple CEO took a hammer to other members of FAANG at a speech in Europe this week, suggesting some companies (guess who?) in the "Data Industrial Complex" are "weaponizing" the management of your personal data. A solution, he suggests, is for the US to enact similar privacy protections to Europe.
For investors waiting to buy the FAANG dip, remember that It's one thing for lawmakers to lob threats at corporations for purposes of political theatre, it's another if the CEO of the world's largest — and richest — corporation is publicly going after rivals. Apple has a mountain of cash they can dispose to lobby for their interests. Also consider that Americans' mood on data privacy has shifted. A recent WSJ poll suggests 68 percent of Americans would now like to see a law similar to GDPR in the US.
Remember big tobacco
If you think FB and GOOG are established monopolies that will continue to profit – no matter the threat—thanks to dominant market share, remember that for decades, big tobacco was a monopoly source of consistent investor returns and dividends… until public attitudes changed. Within a few years, investors holding tobacco stocks lost significantly. And public attitudes towards data privacy have changed dramatically.
Every member of FAANG must increasingly deal with significant data governance issues. So why are some FAANG members better positioned than others? Why put not only your faith but your investment dollars in your "fellow MAAN" vs. selling everything in this correction?
Consider this:
FB and GOOG use personal data to sell advertising as key point to their business model. In return, you get free stuff like sharing and communication platforms, email, video hosting. If attitudes change on that arrangement, they will have to require customers pay subscriptions. That is a significant headwind to both costs and revenue to their existing business model. AMZN and MSFT are also making huge profits from their "data management", but in a more sustainable manner: via cloud and hybrid cloud services. True, both companies will face rising costs for protecting from cyber risk on those clouds, but that is built into to their business models, unlike FB and GOOG who will have to fight rising regulatory costs to sell premium advertising. Google does have cloud services, but it doesn't drive the scale of profits as it does for MSFT and AMZN. FB and GOOG also benefit from not having to invest in user-created content (youtube, FB posts, Instagram, etc.). The lack of editorial supervision or 'fact checking'—similar to what a professional media company is required to do — will increasingly be caught up in this brewing privacy storm. AMZN and NFLX by contrast are investing – and benefiting from—professional media content. They spend money and act like a media company, no data management problems here. No question however they have significant costs to creating or buying content.Due to the size and leadership of these companies relative to the market, everyone has an interest in how this story plays out. We continue to believe a valuable tool in the investor tool box should be paying attention to how company Boards and C-Suites navigate the uncertainty ahead with 'data and technology governance'.
Using this new lens, it's time to break up FAANG in favor of MAAN.
Tim Seymour is a CNBC contributor and advisory board member to Cyberhedge. Ryan Dodd is co-founder and CEO of Cyberhedge.
