FAANGs Are More Solo Acts Than a Tech Supergroup

It’s time for FAANG stocks to break up, at least in investors’ minds.

Facebook, Apple, Amazon, Netflix and Google parent Alphabet can’t get away from one another. Every time one grabs the spotlight —  as Apple did last week when it became the first  U.S. company with a $1 trillion market value — it brings along the other four.

They’re alternately hailed as the hot stocks, technology’s brightest lights and indispensable growth companies, and jeered as a worrisome sign of a frothy and top-heavy market. But look closely and it’s no longer clear why they should be lumped together at all.

Let’s start with the technology moniker. Amazon is a retailer and Netflix is an entertainment company, which is why, contrary to popular perception, the Global Industry Classification Standard, or GICS, tags them as consumer discretionary companies, not tech. And as of the next GICS reclassification in September, Facebook will move from the tech sector to telecommunications, where it belongs. Only two of the five FAANGs, in other words, are true technology companies.

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Investing in Virtue Is Hard When So Few Companies Measure Up

It’s not easy being a socially conscious investor. To see why, look no further than Facebook Inc.

By any reasonable ethical standard, the social media giant doesn’t measure up. The Cambridge Analytica debacle and its aftermath revealed that Facebook is collecting far more information on its users — and even non-users — than it let on. And, as my colleague Shira Ovide pointed out, when CEO Mark Zuckerberg had the opportunity to come clean last week during two days of congressional testimony, he ducked questions about how the company operates.

Facebook’s wily ways appear to be catching up to it. According to a March 21-23 Reuters/Ipsos poll, only 41 percent of Americans “trust Facebook to obey laws that protect their personal information.” An April 8-9 SurveyMonkey/Recode poll askedrespondents which technology company they least trust with their personal information among Amazon, Apple, Facebook, Google, Lyft, Microsoft, Netflix, Tesla, Twitter, Snap and Uber, and 56 percent chose Facebook. The runner-up was Google, with just 5 percent.

Given all the questions surrounding Facebook, investors may be surprised to learn that its stock is commonly held by so-called socially responsible funds, which invest in companies deemed to be good citizens.

The biggest such exchange-traded fund — the iShares MSCI KLD 400 Social ETF, with $1 billion in assets — bills itself as an “exposure to socially responsible U.S. companies” and urges investors to use the fund to “invest based on your personal values.” The fund has a 3.5 percent allocation to Facebook.

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Users Built Facebook’s Empire, and They Can Crumble It

Facebook’s true value resides in its 2.1 billion users, and investors need to worry about what happens if enough of them decide that free social media isn’t worth the cost.

First,  a disclosure: I’ve never used Facebook. I get that it’s an awesome way to keep in touch with family and friends, meet new people and get a personalized online experience. But I value my privacy, and it’s hard to reconcile that with the fact that Facebook is in the business of selling its users’ information.

And it’s a great business. Facebook generated earnings from continuing operations of $15.9 billion in 2017 on revenue of $40.7 billion, 98 percent of which came from advertising.

If it isn’t already obvious that Facebook is a money-making dynamo, consider how it stacks up with digital ad rival Alphabet Inc., the parent of Google. Facebook’s gross margin was 87 percent last year, and its net income margin was 39 percent. That compares with 59 percent and 11 percent, respectively, for Alphabet.

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