Sunday, 8 April 2018

Time to Have Some FAANGs?

The FAANGs - Facebook, Amazon, Apple, Netflix, Google (standing in for parent company Alphabet), are arguably the world's most popular tech stocks today. The FAANG stocks have surged more than 40% collectively in 2017, outperforming the Dow Jones Index and S&P 500.

However the FAANGs out-performance came to an abrupt halt in early March. It has since registered significant fall from the peak right up till the most recent market trading date. Let us look at the FANG+ Index listed on the New York Stock Exchange for a sensing on the drop magnitude.

FANG+ Index, according to its factsheet, is

'an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology or tech-enabled companies such as Facebook, Amazon, Apple, Netflix and Alphabet's Google'. 

It currently holds 10 stocks. Others being Alibaba, Baidu, Nvidia, Tesla and Twitter. 

The Index fell from $2,770 on 12 Mar, to around $2,400 on Friday. This is a 14% drop. 

FANG+ Index one year price chart. Source: Bloomberg.com

Facebook has been hit particularly hard due to the ongoing Cambridge Analytica scandal and users' data privacy issue. It witnessed a roughly 19% drop from $193 to $157.20. 


Facebook one year price chart. Source: Investing.com

Facebook is accused of improperly sharing personal data of up to 87 million users with Cambridge Analytica, which then used these data to deliver targeted news and messages aimed at influencing voters' decision on US presidential election. This is a serious breach of users trust concerned about their personal data privacy. 

Will the scandal drag on and further affect investors' sentiment on Facebook share? Or will it extend beyond sentiment-driven impact on share price, affecting number of daily users and in turn reducing advertising revenue, thus impairing Facebook's fundamentals? I think it is anybody's guess at this moment. 

Make no mistake about it. Based on Facebook's Q4 2017 results, it is still fundamentally strong. Key numbers such as advertising revenue, Monthly Average User, Operating Income are all showing healthy growth.

But I would prefer to take a cautious stance on this issue. Consider that user data is arguably Facebook's most strategic asset, such illegal use of personal data could prompt further regulations by government, limiting the way Facebook can monetise its users data to attract advertising revenue. It may take some time for this episode to boil over, and if any new laws being implemented, a longer period for Facebook to adapt to a new operating environment. 

But I am quite sure we can expect more price volatility going forward. 

However, if an investor is worried about the individual FAANG stock's price fluctuation, are there any options for him to be part of the long term tech and social network growth story?

Well one can consider tech sector Exchange Traded Fund (ETF), especially those with exposure to FAANGs stocks taking up considerable weightage. ETF is also a safer choice as it offers diversification without outsize concentration in any particular stock.

DBS Research recently produce a report citing several FAANG ETFs traded in US worth considering. Some examples include:

  • Technology Select Sector SPDR Fund (Ticker symbol XLK). This ETF tracks the Technology Select Sector Index, and holds mainly large and mid-cap technology stocks. Its top three holdings are Apple, Microsoft and Facebook.
  • Vanguard Information Technology ETF. It tracks the MSCI US Investable Market Information Technology Index holding tech stocks of all size. Top three holdings are same as above.
However, do note that some of these ETFs are Specified Investment Product (SIP) and require investors to pass Customer Account Review before transacting. Do also note if these ETFs use a full or synthetic replication (more risks), or employ any derivatives to track the index performance (more risks too).

Disclaimer: All stocks mentioned in this article are for illustration and education purpose, and do not constitute a buy or sell call. 
The author is not vested in these stocks. 

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