In Focus: FAANG Tech Stocks

Tech stocks have driven global equity returns over the past few years, but the top five FAANG companies now look expensive

Cyrique Bourbon 22 June, 2018 | 8:01AM

 

Cyrique Bourbon: Technology has been a very hot topic for the last few years not just for individual companies but also for investors. For instance, when we look at the performance of global equity markets, a large proportion of global equity market returns in the last few years has come from tech stocks.

If you look at the so-called U.S. FAANGs, Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOGL), you can see how those stocks have performed extremely well. And indeed, the valuations of these stocks have gone up with that.

Two aspects that are interesting to look at, the weighting of these names in the global equity market taking the MSCI World Index as a proxy. So, you've got about 7% to 8% exposure to the so-called FAANGs, which in itself is not that significant. If you look at the valuations though, the story is a bit different.

The valuations are very stretched for the likes of Amazon and Netflix with well-known over 100 times forward earnings multiples, P/E multiples. But when you look at Apple and maybe Google, you've got forward earnings multiples and the P/E basis of about 27 times. So, yes, they are expensive versus the market P/E multiple of about 20 times.

The one thing that's important for investors is to not try and time the market. Valuations can stay overextended for long periods of times. And when we compare, for instance, current valuations of the U.S. equity market now with what they were in, say, the late 90s, which was the kind of most overvalue period pretty much in history for U.S. equity market, they are stretched but not super-stretched. So, big lesson for us is not to try and time the market.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Alphabet Inc A1,199.10 USD-1.14
Amazon.com Inc1,812.97 USD-1.63
Apple Inc192.00 USD0.84
Facebook Inc A208.09 USD-0.61
Netflix Inc364.15 USD-2.93
About Author

Cyrique Bourbon  is multi-asset portfolio manager for Morningstar Investment Management EMEA