(Bloomberg) — For some investors, this year’s rout in high-flying tech stocks is more than a bear market: It’s the end of an era for a handful of giant companies like parent from Facebook, Meta Platforms Inc. and Amazon.com Inc. .
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These companies – known along with Apple Inc., Netflix Inc. and Google’s parent company Alphabet Inc. as FAANG – led the shift to a digital world and helped fuel a 13-year bull run.
But history shows that the market leaders of one era almost never dominate the next. There are early signs that change is already underway: growth has slowed or evaporated for Netflix and Meta, while the sheer size of Amazon, Apple and Alphabet means that they are unlikely to provide the huge returns in the future that they did in the past.
“We think FAANG is unlikely to lead the next tech bull cycle,” Richard Clode, portfolio manager at Janus Henderson Investors, said by phone, adding that he had reduced his holdings in those stocks “very significantly. significant”. “We are at our lowest exposure to FAANG since the acronym was created.”
If this is indeed the end of the cycle for these companies, what an end has it been.
The outbreak of the coronavirus pandemic at the start of 2020 shook the entire stock market, but after a snap-and-you-miss-it plunge, the indices came back strong. Large-cap tech stocks, including FAANGs, led the way as confined consumers ordered goods from Amazon, subscribed to Netflix to watch ‘Tiger King’ and spent hours browsing Facebook and searching Google using iPhones.
But investors are reassessing their longer-term potential now that companies have reopened and higher interest rates around the world have dampened risk appetite.
One of the biggest draws for investors has been the supercharged growth rates offered by tech companies. Now the growth seems more pedestrian.
“Top” sales growth, the characteristic most associated with large-cap tech stocks, is gone, at least for this year, Goldman Sachs strategists wrote in November. The bank’s strategists predict 8% sales growth for megacap tech stocks in 2022, below the 13% growth expected for the broader S&P 500 index.
While Goldman expects tech companies to see faster-than-benchmark sales growth next year and into 2024, the gap is much smaller than the average for the past decade, the company said.
“It’s very difficult to grow these mega-revenues at very, very high growth rates like they have in the past,” said Michael Nell, principal investment analyst and portfolio manager at UBS Asset Management. “While mega-cap stocks have held up well, it’s hard to see going forward that they will necessarily drive performance from here.”
Meta shares lost a quarter of their value in one day in October after the Facebook owner’s fourth-quarter sales forecast came in at the bottom of analysts’ expectations amid a slowing advertising market. Amazon.com fell 7% a day later after projecting the slowest holiday quarter growth in company history.
The example of the former stock market stars gives food for thought. Cisco Systems Inc. and Intel Corp., leaders of the late 1990s dot-com boom, never recovered to the highs reached in 2000, when it took the Nasdaq 100 index 15 years to top its peak of 2000.
Apple, the world’s largest company with a market value of $2.3 trillion, held the best of this year’s bear market, falling 20%. The stock was bolstered by the company’s cash position of around $170 billion, marketable securities and demand for its latest iPhones.
FAANG Group’s other stocks fell more, ranging from Alphabet’s 36% plunge to Meta’s 66% plunge. Even with the declines, the group still represents more than 10% of the S&P 500 weighting, so a below-average performance in the coming years will be a big drag on the market.
And the pain in tech stocks is likely to continue into next year. Analysts expect industry earnings to contract 1.8% next year, compared with expected growth of 2.7% for the broader U.S. market, according to data compiled by Bloomberg Intelligence.
Faced with a higher cost of borrowing and rising inflation, investors are becoming more discerning about the companies they are willing to back. Large investment projects on unproven technologies, such as Meta’s bet on the metaverse, have not gone well. A basket of losing tech stocks compiled by Goldman has plunged nearly 60% this year.
“The market is telling them that we want some short-term profitability and that we can’t afford to fund all of your negative free cash flow. Be a little more realistic: grow a little slower, but do it profitably,” said Neil Robson, head of global equities at Columbia Threadneedle Investments.
Robson is still overweight technology in his portfolios, although to a lesser extent than in the past. He still owns Amazon and Alphabet, though he also invests in companies that improve energy efficiency. UBS Asset Management’s Nell finds opportunities in the software-as-a-service space and semiconductor stocks, while Janus Henderson’s Clode looks to energy, cybersecurity and artificial intelligence, and to areas that could prove resilient in a downturn, such as software companies that could help productivity.
“Two years ago, we could have thrown a dart at a FAANG dartboard and pretty much found a winner, right?” said Dan Morgan, senior portfolio manager at Synovus Trust Co. It probably won’t work anymore.
–With help from Jeran Wittenstein, Subrat Patnaik, Ryan Vlastelica, Michael Msika, Jan-Patrick Barnert and Geoffrey Morgan.
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