The Growth Religion And Big Tech Exceptionalism

A persistent theme in these pages is the notion that being overweight America’s tech titans is unavoidable.

That’s true in a literal sense given their concentration at the index level (figure below), but it’s also true in the sense that being underweight or exhibiting an aversion to the FAAMG cohort is tantamount to being hostile to growth.

With the tech giants, growth is something more than an investment style — it’s not just a thematic preference. These companies quite literally account for almost all of the growth and the sums they invest in generating more of it (growth, I mean) are nothing short of staggering.

Expressing a preference for Value over Growth (with a capital “g”) is a stylistic choice, and although it hasn’t worked very well over the past couple of decades, it’s defensible. An aversion to growth (with a lowercase “g” to denote a more general application of the word) is a non-starter in a world where economic growth is pursued with something akin to religious fervor.

As a quick aside, when I characterized economic growth as a kind of religion last month, one commenter sarcastically pointed to Japan and asked “how’s that working out?” It apparently didn’t occur to that reader that the extreme lengths to which Japan has gone (e.g., the BoJ’s pioneering monetary policy “innovations”) prove the point. Policymakers will pull every lever in pursuit of growth, even when, for emerging markets like Turkey, doing so risks currency crises and other extraordinarily unpalatable outcomes.

Much of the growth obsession is tied up with political ambition. Try running for office on a platform that’s anti-economic growth or even apathetic vis-à-vis the size of the proverbial pie. “Growth has peaked, we may as well live with it” isn’t a message that’s likely to resonate with the populace — not in a democracy, not in an autocracy and not in a dictatorship either. You might run on a platform centered around redistributive policies aimed at slicing the pie differently. And in some ways, that may amount to a tacit admission that, currently, the pie isn’t growing fast enough to avert spiraling inequality. But you’re still unlikely to tell voters that your plan for the economy operates on the assumption that growth will stagnate and that such an outcome is acceptable.

That’s a bit of a tangent, but it helps frame the discussion. One paradox is that technology often acts as a structural force for disinflation. To the extent disinflation hampers growth, it’s ironic (and tragically so for workers displaced by automation) that tech companies have become synonymous not just with Growth as an investment style, but with growth more generally.

“The durability of the revenue streams of the [FAAMG] firms during 2020 was in stark contrast with the extreme declines exhibited by many other businesses,” Goldman’s David Kostin wrote, in a recent note documenting what the bank called “the exceptionalism of ‘Big Tech.'”

Consider that in 2020, the median S&P 500 company suffered a 7% drop in sales during the depths of the crisis. Kostin juxtaposed that with the FAAMG cohort which “collectively grew sales by 18% even at the point of maximum contraction for the economy in Q2.” The figure (below) illustrates the point.

Just as success breeds success and money makes more money, growth can beget more growth assuming you keep investing for it (or acquiring faster-growing rivals before they have a chance to pose a serious threat). “Perhaps the most distinguishing aspect of the FAAMG business models is the amount and share of operating cash flow they devote to driving growth,” Kostin went on to say, in the same note, adding that last year, “the five FAAMG stocks spent $128 billion in R&D and another $104 billion on capex, accounting for 22% of the S&P 500 total.”

An average company might sport a growth investment ratio of a little more than 10%. From 2018 through 2020, FAAMG’s ratio was 64%. “Simply put, they are investing their way to superior growth,” Kostin went on to write.

The US government could perhaps learn from that. When you refuse to invest in growth, you shouldn’t be surprised when you don’t get much of it.

And while America’s tech titans “print money” in a figurative sense, the federal government prints it literally. Between R&D and capex, the FAAMG companies spent nearly a quarter-trillion investing for growth in 2020. Biden’s infrastructure plan calls for $2 trillion in investment over eight years. Makes you think, doesn’t it?