The following article appeared in the Australian Financial Review on November 28, 2017.
FANG fervour has gripped Australia, and with good reason. Facebook, Amazon, Netflix and Google (part of Alphabet) have changed the way we live, work, play and transact. We’re living in a dynamic era and, with Amazon expanding into Australia, it’s a great time to be a consumer.
But I’m going to say something that might sound a little funny and contrary, particularly as someone who has been a shareholder of Amazon and Alphabet for several years.
Yes, the FANGs have many strengths and, yes, have proven themselves adept at extending their leadership positions into many categories (Amazon in particular), but investors here and abroad should take care to not get too far ahead of themselves in assuming that the FANGs will disrupt realms far outside their core competencies.
Consider the planned launch in Australia of a payments application within Facebook Messenger. It’s possible that Facebook might crack the payments code, given its immense scale. However, the odds start to look long when I try to ground them with hard facts and historical context.
Facebook’s interest in payments is not new. The company mentioned “payments” 110 times in its prospectus when it listed in 2012. The company also poached PayPal’s then-president, David Marcus, in 2014 to head up Facebook’s payments business.
Facebook has little to show for the efforts, though, with revenue from payments and other fees making up only 2.8 per cent of total revenue in 2016. Even less inspiring is the fact that revenue from payments and other fees has shrunk to $US753 million in 2016 from $US974 million in 2014.
By contrast, PayPal’s revenue clocked in at $US10.8 billion in 2016, up a cumulative 35 per cent since 2014. So, while Facebook has invested a good deal in payments and talked a big game, history and the available data doesn’t suggest it has made any breakthrough.
In all likelihood the same pattern will occur in Australia. There appears little reason for Australian banks to lose sleep. PayPal has been operating locally since 2005 and has more than 7 million active customer accounts, or about the population of New South Wales. And, yet, despite what I would call an unqualified success of a market entry into payments, the big banks march on.
Lest anyone accuse me of picking on Facebook, it’s not the only FANG that has had its flops. I rate Alphabet as a tremendous business, yet I appreciate that Wikipedia has a category titled “discontinued Google services” that includes 44 entries. Remember Bebapay or Google Schemer? Me neither.
It’s not that I don’t think the FANGs are sharp or even that I think disruption in Australian payments is impossible (witness PayPal’s entry or Afterpay Touch’s ongoing success.)
The point is that investors should ground their perspectives on disruption in hard data and historical context whenever possible. If they don’t, they run the risk of getting distracted by potential disruptions with long odds rather than focusing on the biggest risks that are staring them in the face. If you’re an investor in one of Australia’s banks, wringing your hands over the threat of Facebook payments is like finding yourself balancing on a high wire 20 storeys up and worrying about whether you left the garage door open.
Investors in the big banks have plenty to worry about: high valuations, rising capital requirements, stretched payout ratios, slack wage growth, frothy property prices, the potential for a recession or formal inquiry and the leverage that amplifies the otherwise paltry returns from lending.
But the FANGs? No.
Joe Magyer is the chief investment officer of Lakehouse Capital. He owns shares of Alphabet, Amazon, and PayPal. The Lakehouse Small Companies Fund owns shares of Afterpay Touch. This article contains general investment advice only (under AFSL 40069)
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