2016 was the year tech got "fangs."
Well, not literally. FANGs was a term coined by CNBC business guru Jim Cramer in 2015 to describe the high-performing stocks of the massively successful tech companies Facebook, Amazon, Netflix, and Google (now called Alphabet). Today, it’s not these particular companies that are technically at the top of the Wall Street leaderboard—that distinction falls to Apple, Alphabet, Microsoft, Amazon, and Facebook. But “FANGs” has become convenient shorthand for a phenomenon that emerged in 2016: the value of tech couldn’t be shaken, no matter what volatility existed out in the wider world. This was the year the new giants of tech became a truly dominant market force.
The big moral lesson of the dot-com bubble in the late 90s was that tech could be incredibly risky. Tech stocks were inflated, largely because of buzz and hype. Shareholders soon discovered that a lot of these companies did not end up delivering on their promises of value. (Remember Webvan, Pets.com, Kozmo, and Flooz? Yep, that’s the point.) With abounding opportunities in other sectors of the economy, including retail, healthcare, oil and energy, tech just seemed like less of a sure thing. Yes, the mentality didn’t last forever. Eventually, the world grew to count on the likes of IBM and Cisco as reasonably well-performing stocks.
But in 2016, things were markedly different. Now, tech isn’t just “reasonably well-performing” as an industry. In fact, for at least a few days mid-year, tech absolutely dominated market rankings, pushing out every other industry in the world. Nowadays, there’s a new tech world order, too. The handful of titans you might’ve guessed would be successful forever have revealed their growing irrelevance. The turnover of power to the new giants of tech is well underway. And the emergence of tech’s fangs this year proved it.
Just look at what happened for a few hours in late July, and definitively the next month. At the close of the public trading market on the first Monday of August, the top companies in the world by market value were all American technology companies: No. 1 was Apple; followed closely by Alphabet, Microsoft, Amazon, and Facebook. (Netflix, an original FANG, is still a very successful---and growing---company in its own right. But at least in the law-defying world of enormous tech triumphs, it's not quite made its mark yet.) Such a sweeping takeover by tech in the market didn’t happen even during the dot-com boom. And this means American tech companies surpassed behemoths in other industries often thought of as stubborn mainstays in the top rungs of the public market, like Berkshire Hathaway, GE, and Exxon Mobil.
It's important to note that the “biggest companies by market cap” doesn't really mean these companies make the most money in the world, or produce the most products of value in the world. It only means the company’s shares are worth the most at the moment, when you take share price and multiply it by the total number of shares held by investors. And as any good businessperson well knows, the fates of the markets change quickly. These days, Berkshire Hathaway and Exxon Mobil are back up the leaderboard, pushing Amazon’s and Facebook’s rankings down. (As of this writing, Apple's market cap stands at $626.3 billion; Google's is $553.92 billion; Microsoft's at $493.14 billion; Amazon at $367.7 billion; and Facebook at $342.5 billion. Breaking this solid tech front is Berkshire Hathaway, with a market cap of $410.54 billion, and Exxon at $375 billion.)
This proves that Apple, Alphabet, Microsoft, Amazon, and Facebook have matured to the point of operating like much more conventionally successful companies. “They justify their valuations with actual financial performance,” says Jan Dawson, chief analyst at Jackdaw Research. “Aside from a macro-tech economic failure, I expect these companies to remain at the top,” says Patrick Moorhead, tech analyst at the market industry research firm Moor Insights and Strategy.
What gives these companies their ability to be so sprawling is that each has a dependable, profitable business, Dawson points out. Alphabet has Google search, and its other ad businesses. Facebook has News Feed advertising, its stranglehold on the media as nearly half of American adults head to the social network to get their news, and its domination of mobile through various Facebook-owned apps. Apple has its money-making iPhone and other hardware products. Microsoft’s traditional software businesses have been able to carry the company through. And Amazon has its pioneering Amazon Web Services cloud computing arm, which has been estimated to run 1 percent of the entire internet. “These companies have a core that’s predictable, that throws up a massive amount of profits,” says Dawson.
That’s because they share a few key features. “They hit their financial goals, which then gives them ‘market permission’ to take risks,” says Moorhead. “They have a lot of believers that they will get even bigger in the future based on the big risks they are taking. And these companies hit their product targets in that they deliver what they say they are delivering, typically on-time.” GoPro and FitBit, which struggled in 2016, didn’t share in any of these characteristics. Meanwhile, the tech top five’s unique qualities gave them the ability to experiment in everything from self-driving cars to internet-beaming drones, among so many other moonshot projects. “They can afford to dabble in other stuff. If the only business you’re in is the stuff that people are dabbling in, you become a much riskier investment," says Dawson.
And these tech top five stand out in a year where the big tech bubble was supposed to have burst. For so long, pundits had been warning that too much money had been pouring into the tech industry, and a reckoning was nigh. That assumption wasn't quite right; instead, tech got real. But there were still challenges. The investing climate chilled, and stock prices of once-darling hardware companies plummeted. A retail startup that promised an internet-savvy approach to selling furniture sold itself to the conventional giant it promised to upend. All throughout, these tech five remained massive—and stable.
This is not just a market shift. It’s a cultural shift in the perception of tech stocks, too. “I think this is the first time these companies are being considered as blue-chip companies, when these have tended to be staid, very stable companies in industries that don’t change that much,” Dawson says. Yet even big believers in those staid companies are themselves investing in these new-order giants, he points out. Warren Buffett, CEO of Berkshire Hathaway, revealed this year that his company had invested more than a billion dollars’ worth of stock in Apple—and Berkshire increased its stake in the Cupertino company even further in later months.
Of course, saying that the long-term success of tech’s big five is a foregone conclusion would be foolish. The fortunes of companies rise and fall, and the evidence of this is in history books. For Google and Facebook, the advertising market is only so big. Apple is still struggling to find its next big hardware hit. And so on and so forth.
The biggest, most imminent challenge facing these companies? How tech will be affected by a Trump presidency in 2017. But there’s no way to know exactly how things will shake out at this point. Trump could deliver on his promise to pull offshore cash back, a growth driver for tech companies. But he could also broadly reduce regulation, a good thing. Or he could put massive pressure on Apple to start manufacturing iPhones in the US, a policy that would be both logistically impossible and economically disastrous. It all depends on the bigger question of whether Trump’s campaign promises were literal. But given tech’s initial encounters with the president-to-be, one thing’s for sure: tech and the government will have an awkward time of it in 2017.
