Government regulators are taking a look at FANG stocks in regard to monopolistic and anti-competitive practices. This realization just took the stocks down by several percent each. In fact, all of the FANG darlings are substantially off from their highs a year ago. Are your FANG investments at risk? If so, what are the factors to consider when deciding to ride it out, sell to lock in some of your gains, or buy more shares in hopes of a comeback? CNBC looks at FANG stocks, their recent losses, and what is in store for them.
Fears of increased government scrutiny just crushed FANG stocks.
Facebook, Amazon, Netflix and Alphabet tanked Monday, shedding nearly $130 billion in market cap collectively. Those losses sent Facebook, Netflix and Alphabet into a bear market, having dropped at least 20% from recent records.
The drop came on the first trading day after The Wall Street Journal reported that the Justice Department is readying an antitrust investigation against Google over its search practices and other issues. Alphabet declined to comment.
They go on to say that having to deal with regulators takes management away from making effective decisions for company growth and, by itself, could be damaging.
Gina Sanchez, CEO of Chantico Global, says just the threat of increased regulatory oversight could stymie the FANG trade for some time.
â€œThese companies will be very, very mired in the process of being scrutinized,â€� Sanchez said during the same segment. â€œThey could actually keep these companies so involved in this process over the next two years that they wonâ€™t be able to effectively run and do the things that growth companies do.â€�
And, of course, the look at anti-competitive practices could end up with any of these companies getting broken up as happened to the venerable AT&T in the 1980s.
Are Your FANG Investments at Risk for Other Reasons?
Regulatory concerns are not the only reason that the FANG stocks have cooled off. The group has led the bull market to higher and higher levels since the economy emerged from the financial crisis and Great Recession. There is always a point at which the market price of a stock exceeds its intrinsic value so much that even the most optimistic investor will sell a few shares. The trade war with China affects some of these stocks but not others. And, there is no guarantee that their prices will continue to rise as they may not continue to buy back shares indefinitely.
Are All FANG Stocks in the Same Boat?
To the extent that passive investors are investing in FANG stocks through an ETF, it makes no difference which FANG stock is most strongly threatened by the risk of government regulation. However, Alphabet (Google) is a different business than Netflix and Amazon.com is different than either. Facebook is a totally different animal as well. However, all of these companies have grown large and have the capacity to limit competition in various ways. As such, they become targets for regulators. It seemed such a shame when the old AT&T was broken up but, in fact, the breakup ushered in a great new era of telecommunication in which the better companies with better ideas succeeded and the one who continued in the staid ways of AT&T failed and were absorbed by the competition.
Google is far and away the leading internet search engine. Because of the importance of internet searches in an era where no one used the yellow pages or phone book anymore, it is a major concern for society that this system be fair to all users and not meant to manipulate to hide information.
Facebook has become a major social force and also a hiding place for terrorists and crazy people. This will be regulated at some point as we discussed in our article about FANG regulatory risk.
Netflix is essentially a monopoly but always runs the risk of a newer technology passing it by. Just think of how video cassettes were such a big deal and how Blockbuster controlled the content on movies that it rented. Then everything went to disk and then it was downloaded and then Blockbuster just went away. We are not sure what technology might make Netflix obsolete but there is probably one out there. To give Netflix credit, they have become a movie production and content generator which will always give them something to sell even if they are not the major viewing platform.
Amazon.com is unique in how they have displaced so many brick and mortar businesses but they have also followed the John D. Rockefeller approach of undercutting competition until there is none and then they have the capacity to raise prices. At some point, this behavior will be broken up or regulated.
In the end, we think the FANG investments at risk include all of them. This is a doomsday scenario of these great companies going out of business but the world changes and that simply makes yesterdayâ€™s winners change or fade.