The last few decades have seen a pronounced shift in power to a collection of firms which began life relatively recently, but whose rise to global dominance has been unprecedented. They’re now synonymous with the idea of technological innovation, and they’ve brough many ideas previously confined to science fiction firmly into mainstream consciousness. Thanks to online investment platforms, putting your money behind your preferred name has never been easier – for better or worse. So where should we invest?
The Rise of Fang
The biggest of the four big tech firms are collectively known by the acronym ‘FANG’, which refers to Facebook, Amazon, Netflix and Google. In some circles, Apple (News - Alert) are thrown into the mix, too, giving the slightly longer variant ‘FAANG’.
Creative Taxation
These firms have prospered at least in part by optimising their tax affairs. Last year, Amazon paid just £220 million in direct taxes in the UK, despite their revenues from activity in the country topping out at more than £10 billion. For the twenty-one years it has been trading in Britain prior to 2019, it did not publish details of its tax affairs.
The story is similar in the case of Google, which managed to pay just £44 million in corporation tax in the UK last year, down from £66 million in 2018. Netflix racked up more than a billion in revenue from its UK subscribers, but paid no tax in the UK. In fact, it received a government tax credit instead.
What are the Risks?
The continued rise of these firms, of course, can’t go on forever – or can it? In a recent interview with Yahoo Finance, billionaire investment megastar Warren Buffet claimed to have been approached by Google’s (News - Alert) founders prior to the company’s explosive success. He identified a distinction between FANG companies and the successful firms of past ages: capital. While the capital requirements of something like AT&T (News - Alert) or General Motors are absolutely enormous, firms like Google are relatively lean.
With that said, there are risks associated with Big Tech. According to the Financial Stability Board, whose role it is to assess risks to global financial markets, the entry of the FANG companies into financial services could see them ‘dominate’ rather than diversify those markets, as they have an enormous advantage when it comes to consumer data.
We should also bear in mind that many investors are not technological experts, and that the success or failure of certain ventures might be difficult to predict. Look at something like Amazon’s Spark, which shut down last year following a lukewarm reception. The global financial crisis of 2008 should provide some instruction – when certain sorts of business look like a sure thing, the likelihood is that the investor is being drawn on by herd mentality, and that the stock is overvalued.
What about BAT?
Just as silicon valley has its collection of titanic mega-companies, so too does China – and the Chinese companies have an acronym of their own: BAT. This encompasses Baidu, Alibaba, and Tencent. While these names might be less familiar to western investors, they have greater scope for growth, since the Chinese economy is likely only to grow over the coming decade. Of course, this depends a great deal on the geopolitical situation, especially in the wake of the Covid-19 pandemic.
Is Investing in Big Tech worth the risk?
Big tech have been among the big winners of the coronavirus pandemic. While traditional retailers and other brick-and-mortar companies have been put into effective suspended animation, firms like Zoom and Amazon have enjoyed a surge in demand. Whether these trends persist will depend on a myriad of interrelated factors, and even the brightest investors aren’t able to say with certainty which will thrive and which will falter. What we can say is that it’s rarely wise to put all of one’s eggs in the same basket, and that a diverse portfolio is more resilient than an unbalanced one to shocks of the sort we’re likely to see over the coming years.
