FAANGs continue to flounder, raising the stakes for this week’s earnings from Facebook and Apple

Russ Mould
30 October 2018

The NYSE FAANG+ index is still up by 10% for the year, but it is now teetering on bear market territory, down 19.7% from its close-of-day peak of 3,046 on 20 June.

 
Source: Refinitiv data

“There is an old market rule which says that when the individual stocks or sectors that took the broader market indices higher start to tire and roll over then everyone needs to be careful,” says Russ Mould, AJ Bell Investment Director. 

“The ongoing slide in the share prices of the FAANGs in the USA and Baidu, Alibaba and Tencent (the BATs) in China must therefore be followed closely. If this proves to be no more than a so-called ‘healthy correction’ then all well and good but if these stocks really do start to fall to earth, weighed down by regulatory  pressure, growth concerns or simply their enormous valuations, this could have serious implications for investors’ portfolios.

“Apple is still clinging on to its $1 trillion market valuation but Amazon is now trading way below that mark. Apple’s more consistent cash flow, which stems from hardware replacement cycles and blossoming app and services revenues, may be providing more support for its share price, even if, on the face of it, the company is more mature and its growth prospects are lower than some of the other FAANGs.

“Netflix and Amazon are still up the most for the year but they have joined Google and Facebook in entering a bear market since all four stocks have lost more than 20% of their peak value.

 

 

Facebook

Apple

Amazon

Netflix

Alphabet

 

 

 

 

 

 

Share price 1 Jan

$176.5

$169.2

$1,169.5

$192.0

$1,055.4

Peak share price 2018

$217.5

$232.1

$2,039.5

$419.0

$1,285.1

Share price 29 Oct

$142.1

$212.4

$1,538.9

$284.8

$1,020.1

 

 

 

 

 

 

Change since 1 Jan

(19.5%)

+25.5%

+31.6%

+48.4%

(3.2%)

Change since peak

(34.7%)

(8.5%)

(24.5%)

(32.0%)

(20.6%)

Source: Refinitiv data

“Despite these stumbles, the aggregate market cap of Facebook, Apple, Amazon,  Netflix and Google’s parent Alphabet is still $3.3 trillion, or some £2.3 trillion - just a little more than the entire FTSE 100 combined.

“That means these firms will need to keep providing upward momentum and upside surprises when it comes to earnings and cash flow, as such a substantial price tag leaves little margin for error or scope for disappointment – as the shellacking handed out to Amazon and Alphabet last week suggests.

“Facebook is due to report quarterly earnings tonight and Apple on Thursday.

“Investors in these specific stocks and equity markets more generally will be looking to them for both reassurance and leadership

“History suggests that if prior market leaders roll over, it can be very hard for the broader indices to make fresh gains in a best case and herald a substantial downdraft in a worst case.

“For example, the NASDAQ Composite index rolled over before the broader US stock indices did, just as the bursting of the technology, media and telecoms bubble sowed the seeds of a wider equity market downturn in early 2000. A three-year bear market ensued in the USA (and the UK, Europe and Asia, for that matter).

 
Source: Refinitiv data

“During the 2003 to 2007 it was financial stocks, and particularly banks, that made the running. Lo and behold they peaked in 2006, as someone, somewhere sensed that too much money was being loaned in too free-and-easy a way and that rising interest rates would make things a lot more difficult for borrowers and lenders alike. Global stock indices hit the wall in mid-2007 and a brutal 21-month market slump followed.

 
Source: Refinitiv data

“The past is not guaranteed to repeat itself and the FAANGs’ current loss of momentum may not be a warning that the bull market is about to end. But their swoon may mean that investors should at least consider how much risk they are taking in the portfolio, especially if they have substantial exposure to richly-valued growth and momentum plays via their preferred active and passive funds, or even via direct investment in the stocks themselves.”

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