SIMON BROWN: I’m chatting now with Henry Biddlecombe from Anchor Capital. Henry, I appreciate the early morning time. Faang stocks – Facebook, Amazon, Apple, Netflix and Google – had a rough start, although I’m looking at a chart right now, which shows me year to date, and that shows Apple down 17%, all the way to Netflix down 72%.
It depends how I do my chart. If I zoom out to one year, Apple’s actually positive, Google flat and, of course, Netflix still under pressure. So timeframes certainly matter a lot. But we’ve seen a lot of selling in the first couple of months of this year so far. Are you looking at some of them and thinking these prices are ridiculous and there is now just huge value opportunity here?
HENRY BIDDLECOMBE: Yes, Simon, I think at an index level the story’s almost misleading. When you look at the performance of the average stock in the US market, the drawdown in individual names has been tremendous. In the S&P 500 the average stock’s down by almost 25%. If you look at the Nasdaq, the average stock’s down by almost 50%. So it’s gob-smacking, really.
But when you look at the Faang stocks, ultimately these are higher quality, more growth-oriented names. In an environment where inflation’s running away and interest rates are likely to trend upwards more aggressively than anticipated, these are not the sort of stocks that would outperform.
SIMON BROWN: I get you on that, but they’re also not Peloton, where things are very much going backwards. I mean, this is Apple, which is hugely growth-generative. Google, Amazon, even Facebook – they’ve got some challenges with the new Apple security and they’re spending on the metaverse, but these are not sort of newbie startups. These are established brands with giant audiences and proper revenues and profits.
HENRY BIDDLECOMBE: Well, that’s exactly right and therein lies the opportunity, we think. Part of the challenge for investors at the moment is that it’s very difficult to discern between lapping issues. In other words, when you report your results now, you’re comparing yourself against the very high base coming out of the pandemic, if you’re a technology company; and then on the other side of it some companies may have structural issues. So, for example, Netflix’s subscriber growth seems to have stalled, Facebook’s market penetration seems to have stalled, Amazon’s e-commerce business growth seems to have slowed.
So the question for investors now is: do you think these businesses have operational or structural issues, or is this just a lapping issue?
SIMON BROWN: …a lot of when I’m chatting with CEOs around results, I’m actually looking back at 2019, rather than the previous period, to try and almost remove the pandemic. That’s not really fair to do, but it gives me a better sense of perhaps operational more than anything else.
HENRY BIDDLECOMBE: Well, you have to do that, firstly. But again, these businesses even themselves ultimately can’t put a line through it and tell you exactly what relates to pandemic and what relates to kind of more structural growth headwinds.
But when looking at this set of names I tend to view it as an opportunity. I think that you’re lapping a difficult base. I think that this sort of macro environment isn’t supportive of the growth end of the market. You’ve had significant drawdowns in some great names, and this is probably the time when you want to start rotating into them.
SIMON BROWN: Some of them – Netflix is the one that that’s had the absolute horror time – had the huge pull forward during the pandemic, everyone signed up. And of course that starts to fade. They’ve also got Disney Plus suddenly coming to the market and creating some challenges there.
But I’m looking at price to earnings. It’s a price-to-earnings in the teens. That doesn’t jump out at me and say ‘expensive’. Now, at $680 we could have made the argument, but at $160 this doesn’t strike me – notwithstanding the challenges – as a stock that is priced to collapse.
HENRY BIDDLECOMBE: Yeah. I think Netflix is the most extreme example of a drawdown in this group. And specifically regarding Netflix, this really is a time to take a view on the business. As you point out, 2020 was an incredible year from a subscriber additions perspective; they added 36 million subscribers that year. That’s three years’ worth of subscriber growth in one year.
So at least, from my perspective, for subscriber growth to stall out over the preceding two years is nothing to be concerned about.
Regarding the fundamentals, this is basically the cheapest the stock’s ever been, relative to profits. So if you back the story, and we do, I think this is a great time to go long.
SIMON BROWN: One thing I noticed with Netflix is they had some pricing power. They’ve actually put through price increases – there was a lot of debate as whether that was possible. They’ve managed it. Maybe they lost some subscribers, but again not a train wreck. That pricing power is significant. You add a dollar to every account and, what’s that, $200 million a month you make extra.
HENRY BIDDLECOMBE: Well, think about the value you’re getting as a consumer. We are paying R900 a month for DStv Premium; cable TV in the states is a similar price. For $12 to $13 you’re getting more content than you can watch in a lifetime. So I still think that it’s an incredible value proposition and, just on that alone, I’m quite happy to stay a shareholder.
SIMON BROWN: We’ll leave it there. Henry Biddlecombe of Anchor Capital talking the Faang stocks. Henry, as always, I really appreciate the time and the early morning insights.