FAANG beats BAT – but for how long?

 

FAANG and BAT comprises eight of the world’s largest tech companies. They’re probably in your portfolio, too.

BFacebook (Exchange: New York; ticker: FB), Apple (Exchange: New York; ticker: AAPL), Amazon (Exchange: New York; ticker: AMZN), Netflix (Exchange: New York; ticker: NFLX)

and

BGoogle/Alphabet (Exchange: New York; ticker: GOOGL)

are five of the biggest tech companies listed in New York.

They have a combined market capitalisation of US$2.8 trillion. That’s larger than the GDP of the United Kingdom – the world’s fifth largest economy.

These five tech companies go by the acronym FAANG.

FAANG companies generated US$606 billion in combined revenue last year. They earned US$92 billion in combined net profits.

That’s equal to 5 percent of total annual U.S. corporate profits after tax.

Over the past five years, FAANG stocks have delivered remarkable investment results. On average, their share prices have gained 220.4 percent.

That was five times more than the gains in the S&P 500 Index (45.6 percent) over the same period.

A US$10,000 investment at the start of 2014 would have grown into US$32,040 by the end of last year.

But what about their Chinese counterparts?

Chinese technology giants haven’t done as well

The largest technology stocks in China are Baidu, Alibaba and Tencent. They’re known as BAT stocks.

Baidu (Exchange: New York; ticker: BIDU) is China’s dominant search engine. It’s like Google. Alibaba (Exchange: New York; ticker: BABA) is the biggest Chinese e-commerce company. It’s likened to Amazon.

Meanwhile, Tencent (Exchange: Hong Kong; ticker: 700) is China’s biggest internet services company. It dominates social media with its WeChat messaging app. It rules online gaming. And it even leads cashless payments. More than a billion Chinese use Tencent’s services.

These three companies have a combined market capitalisation of US$859 billion. That’s roughly the size of Amazon, which has a market cap of US$810 billion.

Last year, BAT stocks generated a combined revenue of US$89 billion, and US$24 billion in net profits. That’s equal to 2.7 percent of estimated total corporate profits after tax in China.

So BAT companies’ share of total corporate profits in their home country is half the contribution of FAANG companies to U.S. corporate profits.

How have BAT stocks done?

From 2014 to 2018, BAT stocks increased an average of 88.7 percent.

That handily beat the S&P 500 Index. But it was nowhere the performance of FAANG stocks.

2018 was a bad year for Chinese tech stocks

Three of the five FAANG stocks lost ground last year. But only Facebook saw a decline greater than 10 percent.

By contrast, all the BAT stocks fell by more than 20 percent in 2018.

US$10,000 invested in FAANG stocks would have gained US$718. That’s a decent performance in a weak overall market.

But the same US$10,000 invested in BAT stocks would have ended 2018 with a US$2,520 loss.

That doesn’t paint a flattering picture of BAT stocks.

But it’s important to look at these performances in context of the trade war. Uncertainty over trade has hurt shares of companies that have nothing to do with international trade.

And investing sentiment towards Chinese companies have soured because of a slowing Chinese economy.

Having exposure to both groups makes sense

The performance of BAT stocks leaves a lot to be desired. But the impact they are having on the lives of average Chinese is impressive.

With Tencent’s WeChat, cashless transactions are the norm in restaurants, shopping malls and convenience stores. Hardly anyone carries around a wallet anymore. Even beggars request for cashless donations (helping them avoid getting mugged).

E-commerce in China is lightyears ahead of any developed market. (Alibaba’s Singles’ Day shopping event in November hauled in US$30.8 billion in sales. No other one-day online shopping event in the U.S. comes even close.)

Robot-vehicles are already delivering parcels of goods to the edge of people’s sidewalks.

Thirty million people a day use the nation’s leading ride-hailing service, Didi. Getting around in Beijing has never been easier, even for foreigners who cannot speak a word of Mandarin.

There are now 600 million Chinese using Baidu and Alibaba’s map services. It makes China a much less intimidating place to travel around.

Artificial intelligence-equipped kiosks at airports cut the long wait at immigration.

Electric cars and SUVs are beginning to outnumber gas-powered vehicles in major cities.

This is a country that, in many ways, is already living in the future.

In this sense, FAANG and BAT stocks should not be exclusive. One group shouldn’t replace the other in a portfolio, at least not yet.

That’s because each group gives investors exposure to very different markets.

BAT stocks are almost only focused on China’s growing internet market. They also operate with the full support of the Beijing government.

Except for Apple, FAANG stocks are unable to do business in China.

And while BAT stocks had a bad year in 2018, it means they’re also showing better value going into 2019.

BAT stocks are doing much better so far this year, rising an average of 7 percent since January 1. That’s more comparable to the FAANG stocks’ average gain of 9 percent.

In short, if you want invest in the future, it makes sense to have a both FAANG and BAT companies in your portfolio.

Good investing,
Brian Tycangco
Editor, Stansberry Pacific Research

 

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