It’s no secret that the so-called FAANG family of stocks (Facebook, Apple, Amazon, Netflix and Google) have had an outsized role in propelling the steady run-up in equities over the last decade. Their collective influence has been especially formidable this year, with the tech giants propping up the S&P while other market sectors have slumped, including autos, financials and consumer staples.
It’s clear, however, that the FAANG party could be slowing down. Collectively, the group ended the week of Oct. 22 down 4.7%. Amazon and Netflix were hit particularly hard during the latest flurry of market turmoil, both at one time having shed more than 20% in October.
While these declines may have been sudden, they were hardly surprising. And though stocks have rebounded since, the challenges facing the FAANGs remain the same: valuations are high and the headwinds numerous (i.e., the waning impact of last year’s tax cut and rising rates). That means the sustained and unrelenting growth of the last few years is likely to slow, especially as many of their businesses continue to mature.
With this in mind, another batch of tech-related companies are poised to take over the mantle from the FAANGs and collectively guide the trajectory of the markets going forward. We call them the TANDs: Tesla, Activision, Nvidia and Disney.
**Tesla – Many pundits love to hate Tesla, and Elon Musk’s social media habits and other strange behavior has, at times, provided them fodder to take a pessimistic view. Eccentricities aside, Musk has Tesla moving in the right direction. The company is seemingly no longer burning through cash, a fact punctuated by its most recent earnings report, which revealed a third-quarter profit and strong production numbers.
While Tesla has the potential to transform the auto industry, it has the capacity to do much more, with its influence extending into lithium battery technology, digital ads and the ride-share industry. Tesla isn’t cheap, and no sane investor would argue that it is. At the same time, few companies have as much upside.
**Activision Blizzard – The largest video game company in the world is poised to become even more dominant, thanks not only to popular, money-making franchises such as "Call of Duty," "Warcraft" and "Candy Crush" but also the burgeoning esports industry. The source of ridicule by some when it first started to take off, esports programming has become increasingly attractive.
Disney earlier this year inked a deal to broadcast Activision-owned Overwatch League matches on the ESPN family of networks, along with Disney XD. To date, the ratings haven’t been great, but when you look below the surface, you realize that most viewers are young and male, who are at once willing to spend and hard to reach (in part because this group is dropping Facebook).
The same dynamic describes most ‘gamers,’ which means top brands will target esports programming and seek to create in-game, product placement ads to reach this coveted demographic. That revenue only complements Activision’s high-margin video game business.
**Nvidia – Long a top provider of graphic processing units (GPUs) – which quickly convert code into graphics for computers, tablets, smartphones, gaming consoles and in-car displays – Nvidia is very quickly becoming a leader in machine learning and autonomous driving. In fact, very few developments in the world of artificial intelligence and gaming will occur without Nvidia having some role.
That’s because the competition is lagging in the above-mentioned areas that will drive future growth in the chip industry. That includes Intel and AMD, the latter of which had too much of its business tied up in mining cryptocurrencies.
**Disney – The NFL, despite reports of its imminent demise, continues to attract eyeballs, with ratings up slightly this year. The NBA is also seeing gains in viewership. This is significant because ratings for virtually everything else are down as cord-cutting continues to erode pay-TV subscribers, while also throwing cold water on the notion that ESPN has overpaid for content. Live sports are king, which is underscored by ESPN+ hitting a million subscribers in fewer than five months, even as it doesn’t include many of the network’s top events.
Meanwhile, Disneyflix, the company’s over-the-top offering is due out some time next year. In anticipation of its launch, licensing deals with Netflix to stream high-value content are set to lapse, meaning if you want Star Wars, Pixar and Marvel shows and movies, there will be only one place to find them.
While signing up 40-50 million users worldwide sounds like a lofty goal, Disney should be able to get there given that this will be a must-have app for many parents, which would make it a streaming giant. Strengthening Disney's position even more is its 60% ownership stake in Hulu. The company trades at roughly 17 times earnings, a steal considering Netflix's multiples are nearly seven times as high.
FAANG stocks will continue to have enormous value going forward, so investors should maintain a core position in these companies. In the meantime, TAND stocks present an opportunity to invest in the growth potential of the future giants of tech.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC-registered investment advisor with approximately $840 million in assets under management as of 9/30/18. Gerber Kawasaki clients, firm and employees own positions in Facebook, Apple, Amazon,Netflix, Google, Disney, Activision, Nvidia and Tesla. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation.
