Prediction: FAANG to reap the benefits of COVID-19

The current situation

With the most draconian measures in effect in the UK since World War II, we are now confined to our homes for the next 2-3 months (this is the optimistic view). I am sure we will be talking about this period for generations to come. 

And with the impending recession looming, with predictions that it will be worse than 2008, one cannot ignore that whilst many businesses will suffer in this period of volatility, there are a handful who will benefit.

There are five companies which up until January 2020 had a market capitalisation of more than $4 trillion. These companies are some of the most popular and widely recognised consumer facing brands in the world. They are referred to as FAANG: Facebook, Amazon, Apple, Netflix and Google. 

How will these companies benefit? 

These businesses were already behemoths in their respective industry before COVID-19. If you look at recent filings in the public markets, they were each sitting on significant cash reserves of more than $50 billion (barring Netflix with c. $5 billion) at the end of 2019. Leading the pack is Apple, with more than $200 billion in cash — more than enough for these businesses to weather the storm and double down in their respective areas. 

To delve deeper into how I believe these businesses will become stronger post COVID-19, I have broken this down into 3 categories: Advertising, Retail and Streaming. 

Advertising: Google & Facebook

Over the past 10 years the advertising sector has seen tremendous growth. Google and Facebook have ridden the wave to become by far the market leaders — eMarketer predicts that their combined share of US digital ad spend will exceed 60% in 2020. There are many who will argue that this number is conservative.

Due to the sectors growth, there has also been a huge influx of venture capital available for innovative start ups to compete and take a slice of the revenues available. Just by looking at the lumascape across display, video, mobile etc. you will be able to see the plethora of businesses available to marketers in each category/subcategory. 

Before the virus, many of these businesses would have been in the growth phase — investing heavily across sales, marketing and product to drive scalable revenues. In calmer waters this would normally be fine. However due to the stormier weather, many of the new clients who would normally help these businesses drive scalable growth are also in precarious positions. Many of these potential customers will be pausing new projects, in turn making it more challenging to drive incremental revenue to counterbalance their cash burn.

Many of these businesses will need to pause their growth plans, where in some cases they will need cut costs. Where Google and Facebook are doubling down on hiring, these businesses may need to reduce headcount. In extreme cases some of the businesses will inevitably die — providing VCs with a reason to finally pull the plug on investments where they may have hesitated previously.

Who benefits from this situation more than anyone else? You guessed it: Facebook and Google! The influx of available talent on the market will allow both market leaders to cherry pick their next all stars. With businesses also potentially at risk of going under, the ecosystem will suddenly become less crowded and competitive — releasing more ad spend for both businesses to mop up. Both companies will capitalise on the opportunity available and look to increase their market share above and beyond the aforementioned figure of 60%. As a side note, I have not even referenced Amazon who are making big plays in the advertising space and will continue to do so.

Retail: Amazon

Before the infection struck our shores, retail sales were already in a weak state. As per the data from the Office of National Statistics, in the three months to February 2020, sales were down 0.6% compared to the previous period. This poor performance has been attributed to all store types, with February’s bad weather and flooding playing a big part in the reduction of footfall. With the arrival of COVID-19, all non-essential stores have now been forced to close their doors which will have a more adverse effect on the sector. 

Due to the virus we have already seen Laura Ashley enter administration, with Cath Kidston, Oasis and Warehouse all scrambling around to find a buyer — many more businesses are sure to follow. There are of course some winners in this current climate: namely the likes of Ocado, Sainsbury’s & Tesco in the grocery space, although there are calls from some that they should donate their upside from this crisis to charity. 

Amazon’s foothold in the UK was already very strong before the crisis — according to research from Edge at Ascential, their market share in the UK retail sector was 30% in 2019. With people stuck indoors and no shops open, the use of Amazon’s service will be sure to increase over the coming months. And whilst their stock initially fell from a high of $2,170 (February 19) to a recent low of $1,676 (March 12), it has already started to rebound, where I fully expect it to continue on it’s growth curve post COVID-19.

Streaming: Apple, Netflix, Amazon Prime (and Disney+ )

This one is a no brainer — and you could also include Disney+ in this argument too. When we would normally be socialising with family and friends, we have been confined to our sofas indefinitely. Some of us will read and some of us will take up a hobby and do something productive. However our usage of streaming services such as Netflix, Amazon Prime, Apple TV+ and Disney+ will likely increase. So much so that Netflix has agreed to reduce their streaming quality to deal with the increased demand in bandwidth throughout this period. 

Netflix is currently the market leader in the sector, with a huge amount of owned and operated content available to the consumer. Amazon Prime is gaining market share is expected to challenge Netflix in the years to come. And whilst Apple’s stock has taken a recent beating due to supply-chain challenges on their hardware lines, they have recently released Apple TV+ with a range of content including the award winning “The Morning Show”. Disney+ couldn’t have launched at a better time — they have even fast tracked releases such as “Frozen 2” to streaming in advance in order to drive new user acquisition (in the US, Australia & the Netherlands only). 

And who are the potential losers in this scenario when we are stuck in our homes? In the short term the cinema chains and movie studios are likely to take a hit, with it being impossible to visit the big screen for the foreseeable future. New releases such as the upcoming James Bond feature, which was originally slated for an April release has already been pushed back to the end of 2020 — resulting in a sunk cost and lag in revenues for the respective studio. 

For consumers looking to subscribe to these platforms the cost is low - with fees for all platforms ranging between ￡4.99-￡11.99 (the higher fee relating to Netflix's premium plan). Based on the current climate and their flexible monthly fee structure, these businesses are likely to reap a significant benefit -  increasing their subscription numbers and in turn, monthly recurring revenue. 

Conclusion

As noted above, FAANG already had a market capitalisation north of $4 trillion, where in some cases they had a monopolistic position in their respective markets. Before the virus we were debating whether the likes of Facebook & Amazon should be broken up to curb anti-competitive behaviour and encourage innovation. 

With the arrival of the COVID-19 there will likely be less availability of VC cash in the advertising sector in the short term — in turn having a negative effect downstream on innovation and competitiveness in the market. The retail sector will continue to struggle, with many businesses likely to fold over the course of this uncertain period. For the foreseeable future, we will likely increase our discretionary income on streaming services which may change our buying habits relating to content moving forwards. 

Although FAANG may take a short term hit on revenue and valuation, in the long term they will be bigger and stronger than ever — in turn continuing to fuel the aforementioned debates in the not too distant future. 

The world as we knew it may be a very different place in 6 months...