GAFA Stock Prices Are Down Because They Have Reached Their Growth Limit
Published in Diamond Online
(Japan) on 10 May 2022
by Akio Makabe (link to original)
(Japan) on 10 May 2022
by Akio Makabe (link to original)
Translated from
by Henry Anthonis.
Edited by Helaine Schweitzer.
The prices of GAFA stock are trending downward. This is because the business model that has drawn attention is beginning to show signs of reaching an impasse in effectiveness. In addition to looking back on GAFA’s trajectory, we analyze current risk factors and predict future developments.
The stock prices of the GAFA companies (Google, Apple, former Facebook/now Meta, and Amazon) have been on a downtrend recently; even after the first quarter financial results were released, the companies' stock prices have not increased.
The main point here is that the companies’ growth expectations are slowing down. A deadlock is starting to in their business models as information technology platform providers, a development that has gained a lot of attention. In addition, labor shortages in the United States and economic factors associated with deglobalization are hitting GAFA companies hard.
Going forward, we expect GAFA growth predictions to decline further. If this happens, it is likely to drive down the companies’ stock prices. In the wake of the Ukraine crisis and China's zero-COVID-19 policy, people fear that the efficiency of Apple's business operations, operations that are predicated on accelerating globalization, will decline. Tighter personal data protection regulations in major developed countries and other factors will also lower growth expectations for Meta, Google and Amazon.
The Federal Reserve is tightening monetary policy at a faster-than-expected pace to fight inflation. This is a headwind for GAFA business operations and is raising concern about falling stock prices.
The Business Model Until Now; GAFA Losing Their Divine Power
The general trend in GAFA stock prices over the past year is that they remained high for each company until the first half of December 2021. However, stock prices have not gone up since then. This means that it is becoming harder for companies to sustain high growth.
First, consider the slowdown in Apple's growth expectations. In the United States economy since the 1990s, Apple has symbolized a company that has achieved high growth driven by globalization. In 1997, when the company was on the verge of bankruptcy, the late Steven Jobs, one of the company’s founders, saved the day. Jobs focused on creating high value-added software, and focused on the design and development of devices such as iPods and iPhones and services such as iTunes.
At the same time, Apple imported the best parts and components from around the world and outsourced unit assembly production of finished products to Foxconn, a Chinese subsidiary of Taiwan's Hon Hai Precision Industry Company. This international division of labor freed Apple from the burden of owning its own production lines and allowed the company to focus on creating high value-added software and achieve high profitability. The company accelerated the digital transformation of the global economy after the collapse of Lehman Brothers, and its impact on the growth of the United States and global economies was immeasurable.
In recent years, however, these business models have reached an impasse in effectiveness. First, China's declining working age population and rising labor costs have been significant. In addition, the United States-China trade war has disrupted global supply chains. Furthermore, supply constraints continue to get worse due to a combination of factors, including the reemergence of COVID-19 infections and the crisis in Ukraine.
As a result of such changes, Apple, which achieved high growth by strengthening the international division of labor, is beginning to miss out on demand.
Tighter Regulations on Social Networks, Formation of Labor Unions, Increasing Headwinds for IT Platforms
Growth expectations are also slowing for Google and Meta, which have earned advertising revenues from providing video, search and social networking services, and for Amazon, which has provided services such as online shopping and cloud computing.
Google and Meta rapidly increased their revenues by preferentially acquiring vast amounts of data on individual user searches, video views, social network acquaintances and the purchase histories of goods and services, which they then sold or used for new business.
However, restrictions on social networking platforms have tightened in part due to allegations that Russia used Facebook to meddle in the 2016 United States presidential election. Meta has had to step up its manpower to monitor fake news, something that has increased its costs. In addition, concerns about fairness has led to a temporary decline in the number of Facebook users.
Meta's financial results for the first quarter this year showed the lowest sales growth rate since its listing, raising concerns about the company. Much of the same applies to Google, which has been increasing its ad revenue by strengthening its search services.
Amazon has created a logistics revolution in the world. The company established an efficient global delivery network through aggressive capital investment, and has built its last-mile delivery infrastructure on its own. It has also established itself as a leading IT platform by developing algorithms that tap into the preferences of individual consumers to stimulate consumption and by providing cloud services.
However, the company's growth potential is beginning to fade as labor unions are being organized in response to harsh working conditions at Amazon’s logistics facilities. In addition, it appears that Amazon is finding it increasingly difficult to secure personnel and drivers at logistics centers against the backdrop of the labor shortage in the United States and other parts of the world.
Construction of warehouses and investment in emerging electric vehicle manufacturers are also weighing on earnings. Soaring prices for energy resources such as crude oil have led to higher fuel costs, which have put pressure on earnings. Thus, GAFA companies are finding it difficult to maintain the high rate of growth they have enjoyed in the past.
Medium to Long-term GAFA Stock Decline Concerns, Slowing Pace of Business Growth
GAFA companies are at a critical juncture. Looking ahead, the pace of earnings expansion for GAFA is slowing and the possibility of a decline in their share prices is increasing. This is because each company has built a business model based on the premise of accelerating globalization. However, the Ukraine crisis has begun moving the world economy away from globalization and toward organizing as blocs. As the outlook for the global economy worsens, advertising companies will have to prioritize cost reductions, and ad placements on social networking and video sites will decrease. There will also be increased costs for data protection and policing fake news.
Extended global supply constraints are prolonging semiconductor shortages and increasing the likelihood that production of smartphones and other IT devices will fall short of plans. In China, there is a clear downward trend in economic growth; in addition to lower demand for IT equipment and services, a shrinking working age population will drive up labor costs. All of these factors will hinder GAFA from improving the efficiency of its business operations.
In addition, prices are soaring in the United States and globally, and the Fed will have to normalize monetary policy quickly. Interest rates will rise globally. Higher interest rates will reduce the discounted present value of free cash flows that companies are expected to generate in the future (the sum of values that would be received in the future discounted by compound interest calculations to the present). The higher the growth expectations of a company like those in GAFA, the greater the impact and the greater the concern about a decline in stock prices.
If the Fed takes a stronger position on raising interest rates and shrinking its balance sheet, United States interest rates could rise rapidly, and the downward trend in stock prices of leading IT companies such as GAFA could become even more pronounced. In addition, rising United States interest rates could lead to an outflow of funds from emerging economies, which could lead to a decline in the growth rate of the global economy as a whole. That would impact the decline in GAFA earnings.
In other words, the ability of GAFA companies to create new goods and services and create demand without being bound by conventional ideas is in doubt.
The stock prices of the GAFA companies (Google, Apple, former Facebook/now Meta, and Amazon) have been on a downtrend recently; even after the first quarter financial results were released, the companies' stock prices have not increased.
The main point here is that the companies’ growth expectations are slowing down. A deadlock is starting to in their business models as information technology platform providers, a development that has gained a lot of attention. In addition, labor shortages in the United States and economic factors associated with deglobalization are hitting GAFA companies hard.
Going forward, we expect GAFA growth predictions to decline further. If this happens, it is likely to drive down the companies’ stock prices. In the wake of the Ukraine crisis and China's zero-COVID-19 policy, people fear that the efficiency of Apple's business operations, operations that are predicated on accelerating globalization, will decline. Tighter personal data protection regulations in major developed countries and other factors will also lower growth expectations for Meta, Google and Amazon.
The Federal Reserve is tightening monetary policy at a faster-than-expected pace to fight inflation. This is a headwind for GAFA business operations and is raising concern about falling stock prices.
The Business Model Until Now; GAFA Losing Their Divine Power
The general trend in GAFA stock prices over the past year is that they remained high for each company until the first half of December 2021. However, stock prices have not gone up since then. This means that it is becoming harder for companies to sustain high growth.
First, consider the slowdown in Apple's growth expectations. In the United States economy since the 1990s, Apple has symbolized a company that has achieved high growth driven by globalization. In 1997, when the company was on the verge of bankruptcy, the late Steven Jobs, one of the company’s founders, saved the day. Jobs focused on creating high value-added software, and focused on the design and development of devices such as iPods and iPhones and services such as iTunes.
At the same time, Apple imported the best parts and components from around the world and outsourced unit assembly production of finished products to Foxconn, a Chinese subsidiary of Taiwan's Hon Hai Precision Industry Company. This international division of labor freed Apple from the burden of owning its own production lines and allowed the company to focus on creating high value-added software and achieve high profitability. The company accelerated the digital transformation of the global economy after the collapse of Lehman Brothers, and its impact on the growth of the United States and global economies was immeasurable.
In recent years, however, these business models have reached an impasse in effectiveness. First, China's declining working age population and rising labor costs have been significant. In addition, the United States-China trade war has disrupted global supply chains. Furthermore, supply constraints continue to get worse due to a combination of factors, including the reemergence of COVID-19 infections and the crisis in Ukraine.
As a result of such changes, Apple, which achieved high growth by strengthening the international division of labor, is beginning to miss out on demand.
Tighter Regulations on Social Networks, Formation of Labor Unions, Increasing Headwinds for IT Platforms
Growth expectations are also slowing for Google and Meta, which have earned advertising revenues from providing video, search and social networking services, and for Amazon, which has provided services such as online shopping and cloud computing.
Google and Meta rapidly increased their revenues by preferentially acquiring vast amounts of data on individual user searches, video views, social network acquaintances and the purchase histories of goods and services, which they then sold or used for new business.
However, restrictions on social networking platforms have tightened in part due to allegations that Russia used Facebook to meddle in the 2016 United States presidential election. Meta has had to step up its manpower to monitor fake news, something that has increased its costs. In addition, concerns about fairness has led to a temporary decline in the number of Facebook users.
Meta's financial results for the first quarter this year showed the lowest sales growth rate since its listing, raising concerns about the company. Much of the same applies to Google, which has been increasing its ad revenue by strengthening its search services.
Amazon has created a logistics revolution in the world. The company established an efficient global delivery network through aggressive capital investment, and has built its last-mile delivery infrastructure on its own. It has also established itself as a leading IT platform by developing algorithms that tap into the preferences of individual consumers to stimulate consumption and by providing cloud services.
However, the company's growth potential is beginning to fade as labor unions are being organized in response to harsh working conditions at Amazon’s logistics facilities. In addition, it appears that Amazon is finding it increasingly difficult to secure personnel and drivers at logistics centers against the backdrop of the labor shortage in the United States and other parts of the world.
Construction of warehouses and investment in emerging electric vehicle manufacturers are also weighing on earnings. Soaring prices for energy resources such as crude oil have led to higher fuel costs, which have put pressure on earnings. Thus, GAFA companies are finding it difficult to maintain the high rate of growth they have enjoyed in the past.
Medium to Long-term GAFA Stock Decline Concerns, Slowing Pace of Business Growth
GAFA companies are at a critical juncture. Looking ahead, the pace of earnings expansion for GAFA is slowing and the possibility of a decline in their share prices is increasing. This is because each company has built a business model based on the premise of accelerating globalization. However, the Ukraine crisis has begun moving the world economy away from globalization and toward organizing as blocs. As the outlook for the global economy worsens, advertising companies will have to prioritize cost reductions, and ad placements on social networking and video sites will decrease. There will also be increased costs for data protection and policing fake news.
Extended global supply constraints are prolonging semiconductor shortages and increasing the likelihood that production of smartphones and other IT devices will fall short of plans. In China, there is a clear downward trend in economic growth; in addition to lower demand for IT equipment and services, a shrinking working age population will drive up labor costs. All of these factors will hinder GAFA from improving the efficiency of its business operations.
In addition, prices are soaring in the United States and globally, and the Fed will have to normalize monetary policy quickly. Interest rates will rise globally. Higher interest rates will reduce the discounted present value of free cash flows that companies are expected to generate in the future (the sum of values that would be received in the future discounted by compound interest calculations to the present). The higher the growth expectations of a company like those in GAFA, the greater the impact and the greater the concern about a decline in stock prices.
If the Fed takes a stronger position on raising interest rates and shrinking its balance sheet, United States interest rates could rise rapidly, and the downward trend in stock prices of leading IT companies such as GAFA could become even more pronounced. In addition, rising United States interest rates could lead to an outflow of funds from emerging economies, which could lead to a decline in the growth rate of the global economy as a whole. That would impact the decline in GAFA earnings.
In other words, the ability of GAFA companies to create new goods and services and create demand without being bound by conventional ideas is in doubt.
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