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Fear of the FAANGs


Equity investors should be nervous about US tech valuations as the fabled FAANG (named for Facebook, Amazon, Apple, Netflix and Google) stocks look extremely expensive after reaping in the cash during the equity rally that followed the initial Covid-19 sell-off. With valuations at near-preposterous levels and the macro-economic environment worsening with rising Covid-19 cases and a bitter election around the corner, market moves down last week could be a sign of worrying times ahead.

Although the acronym FAANG relates to a specific group of stocks, the same equity fundamentals apply to other large cap tech names; Microsoft for example has traded similarly to the FAANGs and Tesla’s rise since March, and general popularity among retail investors, arguably means it should also be included in discussions about US tech bubbles.

The tech heavy Nasdaq 100 index fell 6.4% over Thursday and Friday last week as US equity investors took profits before the Labour Day holiday.

The index was up around 70% since the end of March and was near record highs before the sell-off. The Nasdaq’s meteoric rise in less than six months means it has often been used as a barometer for general sentiment towards global equities, which is great for bankers when it is going up but makes ECM deals extremely difficult when it is falling.

The moves down last week were driven by some familiar names.

Apple fell 12% between Wednesday and the end of last week, Microsoft fell around 7% in the same period while Facebook and Amazon both declined by 6.5% and 6.7% respectively.

Google, which trades under the name Alphabet, fell around 8% and Tesla and Netflix fell by 12.7% and 6.8%.

It is no coincidence that these FAANG falls led to a decline in the index; Facebook, Microsoft and Amazon make up around 35% of the Nasdaq 100.

They are less of a heavy weighting in the Dow Jones and S&P 500, which is why those markets did not suffer the same levels of decline. The S&P 500 only fell by 4.2% and the Dow Jones index by 3.36% at the end of last week.

The consensus within equity markets is that investors may be starting to sell positions in tech stocks after the momentous rise in valuations since the bottom of the Covid-19 sell-off in March.

Apple, for example, has risen by 116% since the end of March. The company indeed may be one of the best positioned to withstand the pandemic. It is one of the most profitable firms in the world and has a loyal customer fan base, but Covid-19 has not surely been so good to the company to warrant more than doubling of its stock price in less than six months.

The growth of the company’s is equivalent to around four years of trading before 2020 including the full year of 2019 where Apple’s stock had risen by almost 40%, one of the best years in its history; last week Apple hit a $2.3tr valuation, meaning it surpassed the market capitalisation of the entire FTSE 100.

Amazon has risen by over 70% since the nadir of the pandemic and Microsoft by over 50%. Both Alphabet and Facebook have risen by around 40% and 90% respectively.

Tesla has seen its stock price rise by around 300% since the end of March, driven primarily by retail flows into the stock, according to sources at large institutional investors.

The stock is 198% higher than May 1, when Tesla’s loquacious CEO Elon Musk said the company’s shares were “too high”.

The market is overexposed to a small group of overvalued tech stocks that could send markets tumbling, making even European ECM deals much harder to execute as the large global investors banks want in their books are heavily exposed to US tech.

“Those US markets are too high and the whole thing looks very unappealing,” said a senior ECM syndicate banker in London. “Too much money has flowed into too small a basket of stocks and we could be set for a massive blow-up at some point.

The Nasdaq fell immediately by around 4% shortly after open on Tuesday, the S&P 500 was down by around 2.3% and the Dow Jones by around 1.9%.

Deal makers and equity issuers will be watching with trepidation to see if the FAANGs are about to bite.