February 4, 2022 - 8:00am

Shares in Meta, Facebook’s parent company, fell more than 26% in trading on Thursday. This is the largest single day loss in market cap in history — clocking in at more than $200bn. The tech-heavy NASDAQ index took a hit too, as one of its most important securities lost ground, falling around 3.7%

The immediate cause of the Facebook selloff was a weak fourth quarter earnings report released on Wednesday. Analysts expected $3.85 in earnings-per-share, but Meta only managed to muster $3.67 — which was down from $3.88 a share last year. But the problems with Meta are far deeper than a simple missed earnings report.

Meta has long been a part of the FAANGS cohort of stocks. FAANGS refers to the top five American technology companies trading today: Facebook (Meta), Amazon, Apple, Netflix, and Alphabet (Google). While there is no doubt that these are some of the most prominent tech companies on the American stock exchange, it has been clear to many analysts for some time that their business models are otherwise very different.

If you ignore the market hype and study the companies in depth these differences are blinding. Alphabet, Amazon, and Apple all have very solid business models. Alphabet completely dominates in online search — and hence in online advertising; Amazon dominates in online shopping; and Apple dominates in high-end smartphones and computer equipment. These companies have what equity analysts call ‘wide moats’ — that is, their market positions are so dominant that they seem unthreatened by competition.

Facebook and Netflix are very different. They do not have wide moats. Facebook has long bragged that it is the world’s largest social media company. While true, it is hardly cutting edge in the space. Facebook users tend to be older — and older users tend to be less attractive to advertisers.

The social media space itself seems infinitely more competitive and subject to swings of fad and fashion. Facebook is yesterday’s social media platform — today, the kids are on TikTok. Tomorrow they will likely be on something else. So far advertisers have not been agile enough to ride these trends and have stuck with Facebook, but they are cottoning on.

Netflix is similar. For a few years it held a dominant position due to being the only game in town. But that is no longer the case. From Amazon Prime Video to Apple to Disney, there are a host of substitutes now around. Hulu is not currently available outside the United States but is quite popular there. Perhaps that’s why Netflix’s stock has taken a mighty beating these past few weeks too.

The big question moving forward will be whether these recent declines in the stock prices of some of the FAANGS represents a culling of the herd or a the beginning of something bigger. If it is the former, it is simply the market waking up to the fact that not all FAANGS are created equal. If the latter, it may be the markets tackling the weaker of the bunch first, only to later turn their attention on the stronger players.

The FAANGS are very, very highly valued stocks. This means that the markets expect extremely strong earnings growth moving forward. If this earnings growth is not achievable, their stock prices will have to fall precipitously. This could be the start of a very difficult period for America’s biggest companies.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics