U.S. tech giant FAAMG (Apple, Microsoft, Amazon, Google and Facebook) recently reported second-quarter earnings that beat analysts’ expectations as home isolation paid dividends to Internet companies during the outbreak and the digital transformation of the technology companies continued to benefit them.
As unprecedented capital flows to these big technology companies, their share prices have risen an average of 67% over the past year, while many other companies are facing the toughest quarter in history.
But analysts say that while big tech companies are so hot at the moment, if they continue to buy, they may only produce low returns or no short-term returns.
Why is it reasonable that FAAMG’s share price has soared so much?
Over the past year, FAAMG’s share price has soared 65 percent, far outpacing the broader market.
Interestingly, the chart below shows that the recent rise in share prices was not caused by an increase in revenue. In fact, revenue growth at big tech companies has recently almost stalled.
(Source: Insider OPPOrtunities)
Specifically, data research shows that only a small part of the rise in FAAMG’s share price was due to its performance, which saw the companies’ average annual earnings per share increase by 16.81 percent last quarter. Earnings per share growth in the current quarter was much weaker than the average earnings per share growth over the past three years. At the same time, FAAMG’s current average price-to-earnings ratio is 51.82, 20% higher than in the past three years.
(Source: Insider Opportunities)
In terms of future expectations, analysts say the recent rally also looks unreasonable. In recent earnings conference calls, FAAMG’s management team has been generally cautiously optimistic about the future, with growth likely to slow next quarter as home dividends fade and consumers are cautious about spending. Amazon and Microsoft expect growth to slow, while Facebook, Google and Apple expect growth to stall.
So how do you explain the recent rebound in big technology stocks?
First, U.S. bond yields have fallen sharply over the past few decades, recently reaching a record low of 0.52%. This is due to massive stimulus measures by central banks and the flight of investors to safe assets. Stocks are usually relative to bonds. Stocks are becoming more attractive as bond yields hit record lows.
At the same time, only technology stocks are attractive in the short term in the equity asset class, as non-tech stocks are more affected by the outbreak. In normal times, investors buy “older” value stocks because of stable dividends and free cash flow.
However, these “older” value stocks are now facing their worst quarter ever due to poor market conditions. For example, Exxon Mobil’s revenue fell 52.8 per cent, Boeing’s fell 25 per cent, General Electric’s fell 38.4 per cent and Ford’s 53.5 per cent.
Dividend cuts and suspension rates are now at their highest levels since 2009 and may soon exceed that level.
So is the recent rebound in big technology stocks reasonable? From a financial fundamentals perspective, this is not the case. But in the short term, the overall market situation is reasonable. However, this situation is likely to end soon.
FaAMG shares are at risk of correction.
The bullish sentiment of big technology stocks has never been stronger. These stocks seem unstoppable, and some people think it makes sense to buy at any price. However, analysts believe there are two big short-term risks for big technology companies.
First, the new crown vaccine is expected to be approved by the end of 2020/early 2021, which could lead to a sell-off in technology stocks and a rush for value stocks.
The valuation of growth stocks relative to value stocks is at its highest level since the technology bubble in 2000, and this difference could quickly lead to a major change in market sentiment.
Second, a Biden victory in November’s election could lead to a major correction. Some analysts believe that if Biden is elected president, the corporate tax rate could rise, which would naturally weigh on profits.
Earlier,media reported that big tech companies could be hit if Mr. Biden is elected, as he could be more aggressive in filing antitrust lawsuits against companies such as Amazon and Facebook. In addition, Democrats have pledged to target companies that pay less tax. Companies in the tech industry, especially Amazon and Facebook, are the worst offenders.
So analysts think it would be foolish to keep buying them, given the recent optimism surrounding FAAMG shares and unprecedented valuations. However, given the difficulty of timing the market and the long-term potential of these companies, investors should not sell.