The economic psychology behind the run in Action Alerts PLUS portfolio name Facebook (FB), Growth Seeker portfolio holding Amazon.com (AMZN), Netflix (NFLX) and Google (GOOGL), or Alphabet, should become a case study in how stocks don't necessarily divorce themselves from the fundamentals as much as develop a scarcity value that can't be trumped by the four walls of the spread sheet.
They become something akin to modern art or professional sports teams, valuations which, while they can't be explained by simple numbers, can be examined from the point of view that there just aren't that many of them to go around.
Last summer I had a discussion with an NFL team owner, one I consider among the brightest around. We were talking about how the price of an NFL team just keeps going higher and I postulated that at a certain point there would be a peak valuation.
He questioned my judgment. He said that I should examine last summer's $2 billion purchase of the Los Angeles Clippers by Steve Ballmer and what that meant for the price of the NBA in particular and sports teams in general. He mentioned that the Clippers were a mediocre team, but that Ballmer, by dint of his investment in Microsoft (MSFT) stock from ages and ages ago in addition to his initial holdings, had the money to snap up the franchise for what looked to be an outrageous sum, especially when you consider that if he had held that amount of Microsoft stock he would have had a $400 million gain on the investment, not including dividends.
However, he couldn't pass it up, because of the scarcity value. They just don't come up for sale very much. They are, he said, like classic paintings. Their availability, or lack thereof, sets the price.
In that sense it's a bit like the Reclining Nude by Modigliani, sold at auction for $170 million. Modigliani won't be making any more Reclining Nudes any time soon.
Which brings me back to the psycho-economic value of FANG. It isn't just that all of these companies are doing very well. It's that no other recent vintage company or internet iteration is really challenging them for supremacy.
Think about it. What has Facebook done in the last few years? How about spend its way into an unassailable and ridiculously profitable enterprise made up of your content? Facebook is simply the most sophisticated delivery system of yourself. The only potential challenger out there was Instagram, and it bought that, too, for the chump change of one billion dollar three years ago. Maybe Snapchat comes on. However, can it really come on at the last price of $16 billion? We don't need another Facebook; we have one already.
At various points, we thought that other companies could challenge Amazon, particularly Wal-Mart (WMT), with its giant infrastructure and far-flung supply chain. What we learned this year is that even a company with billions at its disposal couldn't do it. Wal-Mart will spend to try to, but even its efforts are half-hearted or it wouldn't be spending $20 billion to buy back stock at the same time. Amazon never bought back stock, it bought distribution. That was worth a heck of a lot more.
We keep hearing there's a challenger to Netflix. In fact, the stock got hammered when Hulu said something about something recently. But it's 15 points since then. It also dropped on some story about its domestic sub growth being stymied by a payment processing issue. However, being on the board of a subscription company I can attest to the same issue. It was true, and the stock's run is right, particularly because it has another hit on its hands, Narcos.
Finally, there's Alphabet. How many companies tried to dominate search since the dotcom era began? Which one keeps pulling away? How many companies tried to solve the algorithm of advertising? How many did with programmatic selling? Just one. Now, because of its unique structure, Alphabet can spend all it wants on next generation internet while finally monetizing YouTube, which, I can add, has been a pathetic parody of a multi-billion dollar opportunity.
Meanwhile, how about all of these unicorn challengers? Other than Uber and Airbnb, I don't see a lot of stock market value to what's out there. I just see a lot of Squares (SQ), which are total commodities that can come public only at much reduced valuations and then languish anyway.
They aren't scared. They are glutted. Remember the term pyscho-economic. It explains FANG and it explains Square: too many of one, too few of the other.
