India Is Flirting With China-Like Tech Policies and That’s Not Good News for FANG Stocks

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FANG stocks - India Is Flirting With China-Like Tech Policies and That’s Not Good News for FANG Stocks

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The Wall Street Journal recently reported that India is drafting new China-like policies in the technology space that have the ultimate goal of leveling the playing field between U.S. tech giants and India’s home-grown technology businesses.

That isn’t good news for FANG stocks. Between Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG), none of them have a significant presence in China, the world’s largest consumer market, because of protectionist policies. As a result, each of them has been been making a big push in India, the world’s second-largest consumer market.

Thus far, each of the FANG stocks has made successful advances in India. But those advances could get short-circuited if India’s regulation policies become more China-like. In that world, domestic ventures will be promoted at the expense of the FANGs.

With that in mind, here is a look at what each of the FANG stocks stands to lose if India goes China mode.

Netflix Could Be the Biggest Loser

Of all the FANG stocks, Netflix could be the biggest loser.

Netflix doesn’t have a presence in China and it’s already in more than 50% of U.S. internet households. Thus, the company’s go-forward user growth narrative depends almost entirely on international growth, excluding China. The European market really isn’t that big, and the African market has yet to really gain traction.

That leaves India.

Indeed, India is at the heart of Netflix’s multi-year user growth narrative. CEO Reed Hastings has come out and said that India will bring in the next 100 million subscribers for Netflix.

But the company has struggled in India thus far. As it turns out, per capita economics in India remain relatively poor. Those poor per capita economics have restricted just how many people can reasonably afford Netflix.

Those struggles will only accelerate if the Indian government starts working against Netflix. The big problem is that, without robust user growth from India, NFLX stock looks overvalued here and now. At 130 times forward earnings, NFLX stock needs robust user growth to support its valuation. If India cracks down and the growth outlook weakens, NFLX stock could drop in a big way.

Amazon Has a Lot to Lose Too

Netflix could be the biggest loser of all the FANG stocks because it is relying heavily on India for future growth. But Amazon actually has the most to lose right now because they have a huge presence in India.

According to most reports, Amazon has 30% share of the Indian e-commerce market and is only narrowly behind market leader Flipkart. CEO Jeff Bezos and company realized early on that India was an e-commerce market oozing with hyper-growth potential. Consequently, they have been pouring billions of dollars into India to capitalize on that growth potential.

Amazon’s robust India growth narrative, however, could hit a major speed bump if India starts to crack down on Amazon’s abilities in the region. It is worth noting that Flipkart, the domestic giant, was acquired by Walmart (NYSE:WMT) earlier this year. Thus, Flipkart has access to a ton of resources, the sum of which it can leverage to cause serious headaches for Amazon.

All told, if India cracks down on U.S. tech giants, Amazon could lose significant market share.

Google and Facebook Are Better Positioned

When it comes to India government intervention, Google and Facebook are the best positioned to weather the storm among the FANG stocks.

Put simply, neither really has local competition or any reasonable alternatives. Google has 97%-plus digital search market share in India. There really isn’t a homegrown India search engine which will be able to effectively compete. Meanwhile, Facebook and Facebook-owned Instagram and WhatsApp are all immensely popular in India. The social media landscape in India doesn’t really have any homegrown winners, either, that can effectively compete with any of Facebook’s apps.

Thus, while regulation might constrain the ability of these two companies to monetize their massive user bases, the user bases themselves should not be affected by an Indian government crackdown.

Also, of the FANG stocks, Google and Facebook are the two most reasonably valued at ~25X forward earnings for both. Thus, big growth from India isn’t priced in already. The valuations of these stocks can support temporary India market weakness.

Bottom Line on FANG Stocks

The India crackdown threat for FANG stocks isn’t here yet, nor is there any guarantee that it will arrive anytime soon (or ever).

But for those invested in FANG stocks, it is smart to pay attention to what India does here. The more the country adopts China-like policies, the less attractive FANG stocks as a whole become, since global growth is largely priced in.

For now, though, stick with FANG and simply pay close attention to what happens in India.

As of this writing, Luke Lango was long FB, AMZN, GOOG, and WMT. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/india-flirting-china-like-tech-policies-not-good-news-fang-stocks/.

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