What is Going to Knock Them Off the List?
The FANGs (acronym for Facebook, Amazon, Netflix and Google) ride high today. But, creative destruction is relentless. They are no less impervious to disruption than earlier companies. What do you think will do it? Are some of the signs already here?
Seems foolish to consider that one or more of the FANGs might fall and be gobbled up by the digital disruption they unleashed on their competitors. I mean these guys are goliaths. Those four, plus Apple, account for over 10% of the total market value of the S&P 500. Facebook is worth more than half a trillion dollars. Apple has almost a quarter trillion dollars just in cash. The rest of the 500 club are small fry next to them. If the smallest 200 in the S&P dropped to zero value overnight, we would get less than a 10% correction in the S&P 500.
But the pace of change is grinding ever faster. Just 60 years ago in 1958 the average tenure of a company on the S&P 500 was 61 years. By 1965 that was halved to 30 years. In 1990 it was down to 20 years and by 2026 it will be 14 years. Half the current members of the S&P 500 will be replaced within the next ten years. Our downward trend line is even a bit conservative due to the recent phenomenon of “unicorns”. Because Uber, Airbnb, SpaceX and others are not public they are ineligible for the S&P 500. Imagine the shakeout if/when these are added.
The common thread to this upheaval: new companies creating new products, services and markets that the incumbents could not meet. Can’t imagine that fate falling upon any of these FANGs? Look at the heavyweights that folks thought at the time would reign supreme. It’s a pretty shocking roll call. Here are just a few: Sears, Avon, Kodak, and the New York Times. The only company that has managed to stay on the list continually since it was started in 1926 is GE and it is not without its troubles today. What make you think that this time it will be different? Let’s take a look at the FANG members plus Apple.
First, there’s Facebook who joined the S&P in 2013. Recent publicity about fake news and Russian meddling is not helpful but it really hasn’t put a scratch on performance. More worrying is the trend that teenagers are turning away from it. Social media can be fickle, witness Twitter and MySpace. Also troubling are reports that Mark Zuckerberg lives in a bubble surrounded by sycophants. It does seem like many of his recent action indicate he has lost touch with the market and “just doesn’t get it”.
Next up is Amazon, added to the S&P in 2005. Jeff Bezos has created quite a business model and culture. Despite stumbles they just come back relentlessly. Not always good at hardware – remember the Fire Phone fizzle – boom; try out Alexa, the home assistant with AI. Alibaba crushing your China expansion hope – boom; pour it on in India. Business model working pretty well in retailing – let’s extend it to groceries big time (buy Whole Foods). And while we are at it how about pharmacy – is that Big Pharma we hear wailing in the distance. Amazon looks like it’s on a roll but could something like Blockchain trip them up?
How about our good friends at Apple who joined the S&P in 1982? They have gone through a few near deaths but have always come back. But is their time running out? Product development is a snooze. The latest iPhones and Apple Watches were just OK. They are behind in AI, the next key technology, and SIRI is so bad they had to use Google’s search AI to raise its intelligence. Finally there is the big red flag of hubris: Apple’s new “spaceship” headquarters! The landscape is littered with companies who built monuments to themselves only to discover their days had past. With 35 years on the S&P list perhaps it will be the first to go.
Then there is Netflix who started its S&P tenure in 2010. Shortly thereafter we thought it had bought the farm as it stumbled in managing the transition from mail order DVD’s to streaming. The stock plunged 50% in just two months. Today CEO, Reed Hastings, has taken it to a new place with Emmy award wining shows, a global audience and an exploding subscriber base. They are looking pretty good right now. In fact it looks like they are beating everybody up, including Amazon. But, is there something on the horizon that could disrupt them?
Last there is Google (or more properly Alphabet) who has not been “doing any evil” on the S&P 500 since 2006. Google has a challenge. Most – 87% – of its revenue and profits come from advertiser supported on-line search. Everything else is “other revenue” a collection of what some might call experiments that seem difficult as a demonstration of strategic direction.
Google is the dominant (the Europeans would say monopolistic) provider of search and it is extraordinarily lucrative. But, it is a one-trick pony and history teaches us that’s a perilous strategy. Eventually, someone comes along and eats your lunch. Even today Facebook is eroding some online/mobile revenue. Perhaps cloud computing will be a bright spot for Google since it’s growth appears to be driving the expansion of other revenues. That might be a tough bet since both Amazon and Microsoft were there first and entrenched.
Quite a survey isn’t it. These guys are at the top of their game. It doesn’t mean they don’t make mistakes but they recover. Now here is an easier exercise. Pick some other members of the S&P 500 and consider how you would disrupt them. Perhaps you work for one of them. Go ahead think about it. The attack always seems to come out of the blue or begins as nibbling away at the edges. Could it finally be GE’s time to leave the list?
By John Pientka