April 2019 Issue
The impact of the five most popular and best-performing tech stocks – Facebook, Amazon, Apple, Netflix and Alphabet, collectively known as FAANG stocks – on markets has been considerable in recent years.
Indeed, the massive growth of these tech companies saw the worth of the FAANG stocks rocket – exceeding $3 trillion by mid-2018 – with many prominent fund managers moving quickly to acquire or increase their stake. Moreover, such has been the success of FAANG stocks that in 2018 they were credited with over 80 percent of the performance of the S&P 500, as well as driving 80 percent of total market performance in a global index of over 1000 companies.
However, in the closing months of 2018, FAANG stocks began to falter – down 25.6 percent by the end of December – as problems such as Facebook’s alleged data privacy scandals, Apple’s declining iPhone sales and Netflix’s rising content costs and worsening negative free cash flow have kicked in and pushed the stocks into a bear market. All in all, the stocks shed more than $1 trillion in collective value.
“2018 was a year when at the start of it you had to own FAANG stocks, and at the end of it you do not want to own any of them,” Kevin Landis, a portfolio manager at the Firsthand Technology Opportunities fund, told Reuters.
So, with shares of FAANG stocks faltering, fund managers and analysts are reconsidering their approach to growth, such as treating the stocks less like a single bloc and more on their individual merits, while searching for the next big growth companies that can lead the overall market higher.
Faltering stocks
Drilling down, the reasons why FAANG stocks have faltered are basically a combination of shared problems and individual woes. Some see the drop in FAANG stocks as part of a stock market correction triggered, in part, by rising interest rates. Others point to fears over a deepening of the trade war with China. Another key factor is increasing regulatory pressure.
“It has been a slow motion train wreck,” Michael Pachter, an analyst at Wedbush Securities, told Investor’s Business Daily. “The steep slide in the stock market will likely break apart the popularity of investing in FAANG stocks as a single trade. Facebook has almost daily scandals and Netflix has the impending loss of Disney and Fox content. But the others have really done nothing wrong.”
“After the battering taken by tech stocks in the latter months of 2018, there has been a measure of realignment, with a number of companies expected to perform well in 2019.”
Also of concern is a projected slowdown in spending on information technology, with Gartner forecasting tech spending to grow by 3.2 percent in 2019 to $3.8 trillion – down from an expected 4.5 percent.
“It is very hard to call a bottom in FAANG stocks, as these companies are driven by different end markets and fundamental factors,” said Andrew Braun, a portfolio manager at Pax World Funds, in an interview with TheStreet. “The recent volatility in FAANG has been disproportionately driven by weakness in Apple and its suppliers.”
Rehabilitated stocks
According to a number of analysts, some members of the FAANG stocks group are likely to recover more quickly than others, with Facebook forecast to be the slowest to rebound. To address the social media giant’s privacy and cyber security woes, a change in management is among the options said to be available.
In terms of Facebook’s fellow FAANG stocks, such as Apple, the prospects are better. Its shift from products – the pricing of which the multinational has been heavily criticised – to services revenue is expected to pay off in the long term.
“Companies that have depended on social media advertising are going to see some incredible regulatory scrutiny,” Tom Plumb, portfolio manager of the Plumb Equity fund, told Reuters. “I would like to see a couple more quarters at least to see how FAANG stock companies adjust their business models before buying their shares.”
Favoured stocks
After the battering taken by tech stocks in the latter months of 2018, there has been a measure of realignment, with a number of companies expected to perform well in 2019.
Among the companies forecast to attract the attention of investors are the likes of Adobe Inc, Visa Inc and Microsoft Corp, essentially those with strong recurring revenue streams.
“A lot of what we are seeing is a re-reading of what the valuations should be,” commented Brian Sterz, an investment adviser at Miracle Mile Advisors, to The Street. “However, in a shaky economy, it is hard to sustain those high valuations when things get tricky.”
So, although often volatile and unpredictable, the technology sector remains a solid opportunity for growth. And with decisions as to the best tech stocks to buy in 2019 continuing to beckon, investors seem unwilling to sound the FAANG stocks death knell just yet.
© Financier Worldwide
BY
Fraser Tennant