The FAANGs, as they became known – Facebook, Amazon, Apple, Netflix and Google – could do no wrong. In fact, even if investors had only bought those companies over the past few years, they would have generated some really good returns on their money.
Investing will occasionally look easy and this was one of those times. However, in the past few months, it has come down to earth with a bump. Amazon shares have dipped from around $2000 to $1600, while Apple shares are down from $230 to $175 (over 20%).
It is important to put this in perspective. As Laith Khalaf, senior investment analyst at Hargreaves Lansdown points out, “Amazon shares are still 37% up this year, despite shedding 20% of their value in October.” In other words, investors have still done pretty well even if they’ve had to suffer a little in recent times.
At the same time, the outlook for these companies hasn’t changed significantly. Amazon is still growing its revenues at around 40%; Netflix at a similar pace. More importantly, these companies are beating analyst expectations, usually the indicator of a company doing really well. They are still disrupting retail and television as we know it. They also have deep pockets to invest in other areas.
So what has gone wrong? Nothing has changed except sentiment. Anthony Willis, investment manager at BMO Global Asset Management says: “There hasn’t been any specific catalyst to weaken sentiment; it seems that risk appetite is yet to recover from the events of October, with the tech names that led US indices to record highs in late September particularly struggling.” They were at the forefront of the boom and were an easy target when sentiment shifted.
Sentiment is shifting because of many things: rising US interest rates, the trade war between the US and China and the potential for a slowdown in the Chinese economy. There is also a sense that this bull market is getting a little long in the tooth – valuations are a little high and need to be brought back down to earth.
For the future? US technology stocks polarise investors. There are those who love ‘em and those who hate ‘em. Khalaf believes they shouldn’t be written off: “In theory rising US interest rates could create a headwind for these growth stocks, though the vast sums of passive money finding its way into the FAANGs and the new digital world order means it takes a brave soul to bet against the likes of Facebook and Google.” The FAANGs benefit from money going into ‘passive’ index funds because they are the largest stocks in the index.
Fidelity’s multi-asset portfolio manager Bill McQuaker takes the opposite view: “We have been underweighting the FAANG stocks, with a bias towards more defensive value stocks. We also further reduced our technology exposure by deciding to short semiconductors in some of our funds; often a “canary in the coal mine” for the direction of technology stocks.” ‘Shorting’ is when a fund manager takes the position that a company’s share price will fall and positions the fund to benefit from that fall. In other words, McQuaker believes there is worse to come.
These companies are still the great innovators. They have deep pockets and are benefiting from every technology trend going. They’re into artificial intelligence, driverless cars, drone, virtual reality. They’ll probably set up offices on the moon. Investors can now get them 25% cheaper, so – in theory – if they were willing to buy them before, they should be willing to buy them now.
However, the recent rout should serve as a reminder to remember valuations when investing. A stock may look super-sexy and be single-handedly solving climate change or creating robots to do the dishes (two pretty big problems in BM’s world), but if it’s too expensive, you’re not going to make any money out of it. The FAANGs are still the future, but investors need to be careful what they pay and remember that they are not a one-way bet.
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