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You have to wonder about the timing of Facebook’s announcement that it’s changing its name to “Meta.” It seems like a great way to divert attention from the torrent of bad press it has been receiving thanks to a whistleblower’s leaked documents, painting Facebook in horrible light. But it’s not just a bad image Facebook is dealing with. The company – along with several other FAANGs – is facing the rising threat of a planned tech crackdown from our government. If successful, would this crackdown truly level the playing field? That’s what our macro specialist, Eric Fry, tackles in the essay below. In short, there’s a limit to what the government can do to stop a dynamic we all see happening – tech is taking over. This is a part of something Eric calls the “Technochasm.” While we can’t stop it, we can align our wealth with it. I’ll let Eric provide more details as to how. Have a Happy Halloween! Jeff Remsburg |
Facebook Whistleblower Reignites FAANG Vulnerability… or Does it?
By Eric Fry
This past Monday, Facebook Inc. (FB) dominated the news following a whistleblower’s leaked documents and subsequent 60 Minutes interview.
The documents were provided by a former Facebook employee and data scientist, who took tens of thousands of pages of internal research before she left the company. She alleges that Facebook concealed evidence that its platforms amplified misinformation, political division, and hate, among other claims.
Market darlings like Facebook are not strangers to being under fire; Facebook’s story is just a rehashing of what we’ve seen happen to Alphabet Inc. (GOOGL) – and what may be underway for Apple Inc. (AAPL).
As it was announced in June, lawmakers planned to crack down on tech companies. Here’s a snippet of what The New York Times revealed about it:
The bills — five in total — take direct aim at Amazon, Apple, Facebook, and Google and their grip on online commerce, information and entertainment. The proposals would make it easier to break up businesses that used their dominance in one area to get a stronghold in another, would create new hurdles for acquisitions of nascent rivals and would empower regulators with more funds to police companies.
But does it mean the golden era of Silicon Valley is nearing an end?
Not necessarily… I’ll tell you why.
The Dividing Line
In less than two months, Facebook has lost nearly $200 billion in market value and has had to surrender its $1 trillion valuation tag. The FAANG companies – Facebook, Amazon.com Inc. (AMZN), Apple, Netflix Inc. (NFLX) , and Alphabet – are the top five most popular and best-performing U.S. technology companies. Considering the FAANGs make up 19% of the S&P 500’s valuation and possess a combined market cap of $7.4 trillion, it puts a massive target on each of their backs.
The dominance of the FAANG stocks and the resulting antitrust efforts against them are side effects of the phenomenon that we call the “Technochasm.“
As money flows into these companies, not only do their shares soar… but they also become more dominant in the U.S. economy, society, and culture.
Just consider the chasm between Facebook’s or Apple’s influence over all our lives and the current influence of, say, General Motors Co. (GM) or Kraft Heinz Co. (KHC).
That’s one obvious example of the Technochasm phenomenon.
But do the monopolistic practices of these specific companies mean that Washington’s regulatory “hammer” is now aimed at all of Silicon Valley?
I doubt it.
Any antitrust action the government might bring against tech companies would focus solely on gigantic companies like the FAANGs.
The rest of the tech sector would conduct business as usual, without any threat of government interference.
But even if the FAANG sector escapes the talons of antitrust legislation, they should not be the stocks that top your list of promising investment candidates. Yes, they are great companies. But they have become too large to deliver major upside gains, relative to smaller tech plays.
Compare Apple, which has a market cap of over $2 trillion and dominates several tech subsectors, to one of my favorite Technochasm stocks. It has a market cap of just over $1.5 billion and is growing fast within its tech niche. You can learn about that stock here.
Because of its small size, the stock I prefer to Apple could easily double or triple over the next couple of years. The $2 trillion Apple cannot.
The small companies that develop impressive new technologies are capable of surprising us… and have the potential to soar 10X over time.
Bottom line: If you’re looking to invest in tech because you want to see big returns, you can’t just look at the FAANGs and the other giants of the sector. Instead, set your targets on the small, innovative leaders of tomorrow. That’s the best way to put your portfolio on the winning side of the Technochasm.
Go here to find out more about some of the specific tech winners I’ve been recommending.
Regards,
Eric Fry
