With both Facebook and Netflix taking a hit on earnings, it is important to remember that the growth metrics for these two tech leaders are focused on signing up more consumers — in Facebook's case it is users, and in the case of Netflix it is subscribers. Facebook fell short on users in its most profitable market, North America. Netflix, already saturating the U.S. market, fell short on adding international subscribers.
But Alphabet and Microsoft, focused on getting more businesses and profit from enterprise cloud services, received a positive response from investors after reporting. FANG always has been a mix of consumer discretionary and actual technology, and the actual tech part is more important right now to short-term investor confidence.
In fact, analysts looking for ways to wrap their heads around the Facebook disappointment and look ahead to the next big thing asked a revealing question on the Wednesday conference call:
Given the massive data center investments the company has made, are there ways to improve the return on investment of those investments, "perhaps service third-parties to maybe just improve those returns in the way that other tech and internet companies have in terms of investments in infrastructure?"
Mark Zuckerberg dismissed the idea: "I mean, the quick answer is that we're not planning on going in to the cloud services. We're not planning on doing that. We have to build out all this capacity to serve our community. It's a very computationally and resource-intensive set of services that we provide, and we need to build that out."
Alphabet CEO Sundar Pichai, on the other hand, talked up the cloud growth its earnings called and said rather than seeing it as a zero sum competition right now, there is business growth for all the major players still to come.
Daniel Ives, chief strategy officer and head of technology research at GBH Insights, said this divide between secular trends within the FANG group of stocks — the cloud trend on one side and the consumer trend on the other — is key right now to understanding tech stocks.
"There is a massive transformation in the cloud and a growth trend giving major power to Amazon's AWZ, Microsoft's Azure and up-and-coming cloud player Alphabet.
Ives said Netflix has owned streaming in the U.S. market, but the miss on international subscriber growth was the culprit for softer earnings and guidance. Facebook's highly profitable North America growth has been stagnant and disappointing.
"With FB and NFLX, their sweet spot, their DNA has been growth domestically and looking to expand internationally. ... When you look on the enterprise side, it is a unique secular trend. We're staring at a fork-in-the-road situation," Ives said.
He added: "The enterprise guys and cloud players have a much easier time, as well as competitive dynamics that are benefiting the clear winners, whereas on the consumer side it is becoming a much more crowded, competitive landscape and some of the traditional sweet spots have backfired from a growth perspective for FB and NFLX."