May 28, 2020
Global is the next avenue of growth for FAANG, and India is a core part of this growth
FAANG, an acronym coined by CNBC’s Jim Cramer in 2013 has become a household term not only in the US but across the world, especially in India. For the uninitiated, FAANG stands for Facebook, Apple, Amazon, Netflix, and Google, the technology behemoths that are reshaping our world. Combined, these companies have a market capitalization of $4.1 Trillion. Apple, Google and Amazon have individually breached the elusive $1 Trillion in market cap mark. To put that into context, a market cap of $1 Trillion is larger than the GDP of 90% of the countries in the world!
Throughout their lifetime, the underlying theme for all of these companies has been growth and innovation. As Jeff Bezos alluded to when he said, “Your Margin is my Opportunity,” these companies have disrupted multiple industries and competitors by out-innovating and out-growing them. Now as they look to drive the next leg of growth and innovation, one commonality that stands out is their focus on global expansion.
In today’s world a company cannot have a global presence without having a sizable presence in India. The FAANG companies have realized this and all of them have India as a core part of their global expansion strategy. Let’s look at some of the initiatives each of these companies are undertaking to expand their reach across the world and India.
Facebook has recently been in the news for its massive bet on India via a $5.7 billion investment in Reliance Jio. This has been Facebook’s largest overseas investment. The company has long been bullish on India, but has faced multiple regulatory challenges. This investment will not only help Facebook navigate the Indian regulatory environment better (with Jio’s support), but also gives the company access to millions of Kirana stores across India through the Jio network.
Figure 1: Facebook’s largest acquisitions and investments
Facebook currently derives a majority of its revenue from North America and Europe but with the recent investment in Jio, it has gained a strong foothold in the India market. The partnership aims to combine Reliance’s JioMart offering with Facebook’s WhatsApp to create a product that allows Kirana stores to go digital with the services they offer.
For Apple, geographic expansion is not only relevant from the demand side, but also from the supply side. Since the majority of Apple’s manufacturing partners are based in China, the company is often caught in the ongoing US-China trade war. To reduce supply-chain reliance on China, Apple started to geographically diversify its supply chain across India and Vietnam.
Currently 30% of Apple’s Airpods are produced in Vietnam, but the company is also looking at potentially making $40 billion worth of iPhones out of India. This would make Apple India’s largest exporter. On the revenue side of things, given the premium price that Apple demands, the majority of its sales are still from countries in the West. To be able to penetrate the Asia markets, Apple will need to tweak its product strategy for emerging economies.
In 2019, Amazon generated $74 billion (20% year-on-year growth) in revenue from its international business. This contributes towards 27% of the company’s total annual revenue.
Figure 2: Amazon’s revenue split
Leading this international growth are five key markets – Turkey, Australia, Mexico, Brazil, and India. India remains the company’s largest international opportunity. Realizing this, Jeff Bezos, in his January 2020 India trip, talked about how Amazon will invest $1 billion in its India operations (adding to the $6.5 billion the company has invested in India since 2013). The company also announced that it would hire an additional 50,000 temporary workers in India to meet a surge in online deliveries demand. And finally, Amazon launched its food delivery service, called Amazon Food. This service will compete against the likes of Swiggy and Zomato.
Along with India, Mexico and Australia are also important markets for the company and are estimated to contribute up to $2.9 billion and $2.3 billion respectively towards Amazon’s revenue by 2023.
Netflix is the smallest FAANG stock in terms of market cap. The company faces very unique challenges in its bid to expand internationally. These challenges are in the form of local content licenses and existing competition. Unlike other companies discussed in this post, Netflix’s global expansion is predicated on the content being spread globally. Unfortunately, in some cases. 3rd party content licensing deals need to be secured region by region, and sometimes country by country (especially for locally sourced content). On top of that, tough competition that offer home-grown content already exist in many countries (e.g. Hotstar in India).
Despite these challenges, Netflix has expanded across 190 countries in 7 years, using a phased expansion approach. The company first focused on adjacent markets such as Canada, then used the learnings from the first phase to expand into 50 other countries, and in the last and third phase entered the rest of the 190 countries. As the growth for the US business has slowed down due to both market saturation and increasing competition, international subscription growth is the primary growth driver for Netflix.
Figure 3: Netflix’s International vs. US subscribers (millions)
Netflix’s growth in India is still in its early days, but is growing rapidly. The company’s India revenue increased by 700% year-over-year in 2019, while profits saw a 25X increase. In addition, as one might expect, the company has seen increased engagement on their product during the lockdown – the time spent per user in India shot up to 80 minutes a day compared to 50 minutes a day pre-lockdown.
Google’s core product, its search engine, is inherently global and has a widespread global presence. It commands 30% of the $110 billion global digital advertising market. YouTube is becoming a large part of Google’s digital advertising domination and is expected to contribute $9.3 billion towards 2020 revenues.
Google is just starting its foray into India and Southeast Asia. The company is also re-entering China. Since Google is not willing to be compliant with the Chinese government’s privacy and censorship policies, the company is still unable to operate its search business (and therefore derive meaningful advertising revenue from the region). Nonetheless, the company is trying different avenues. Google is looking to take advantage of China’s growing cloud market by offering its cloud services out of data centers run by local Chinese companies.
For countries like India, Indonesia, Brazil and Nigeria, Google is specifically focused on capturing users who are joining the internet for the first time, primarily through their mobile phones. The company believes that there are exponential growth opportunities in this segment of users.
In India, the company has undertaken multiple initiatives to widen its presence. Google opened a research lab in Bengaluru to focus on the advancement of computer science research. Google Pay has become one of the largest UPI payments platforms in the country, with more than 67 million users. The company also has a track record of developing its apps for India first, before bringing them to the rest of the world. One such app is Read Along, an app aimed at helping kids learn better at home.
Overall, as US growth saturates for these large technology companies, geographic expansion will be essential if they want to continue to out-grow and out-innovate other companies, and improving their India presence will form a core part of this geographic expansion.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.