Megacap optimists buckle under weight of bear market

The share-price targets for FAANG companies have fallen over 17% on average in 2022.

The brutal rout in tech stocks this year is shaking analysts’ confidence in once high-flying megcaps.

Brokerage firms expect shares of the so-called FAANG companies in aggregate to trade for less in the next 12 months than they had projected at the start of the year. The share-price targets for Facebook owner Meta Platforms Inc., Apple Inc., Inc., Netflix Inc. and Google parent Alphabet Inc. have fallen by more than 17% on average in 2022, putting that measure on track to decline over the year for the first time on record.

The turnabout in sentiment reflects the bear market that has hit the Nasdaq 100 Index this year, triggered by Federal Reserve interest rate increases, the impact of surging inflation on consumer demand, and supply-chain snags, all of which have fueled fears of an economic slowdown.

“It’s analysts catching up to reality, and this is a massive change on how companies are being valued,” said Greg Taylor, chief investment officer at Purpose Investments.

“We’re now going to get the reality that with interest rates at these levels and inflation at these levels, these high-growth companies are not going to be valued the way they were.”

The headwinds also have shown up in weaker-than-expected quarterly results. Amazon experienced a historic rout amid slowing e-commerce growth and disappointing forecasts, while Apple warned that supply constraints would hurt sales. Netflix had a shockingly weak subscriber outlook and Alphabet released first-quarter revenue that fell short of analysts’ expectations.

Steadily rising profit estimates — a hallmark of the group for years — are now hitting a wall. The average 2022 earnings per share estimate for Amazon has fallen more than 50% over the past month, according to data compiled by Bloomberg. Alphabet has seen its estimates drop 1.7% over the same period, while Apple, Microsoft and Meta Platforms projections are little changed.

Even after a 22% drop for the Nasdaq 100 this year, some investors say tech stocks are still too pricey. Amazon sits at the top, trading at about 40 times estimated earnings, while Apple is at 25, Alphabet and Netflix are at 16 each and Meta at 14. The Nasdaq 100 Index is at 18 times projected profits.

“While some technology stocks are facing earnings challenges, the key issue in this current market rout is not so much earnings, but valuations,” said David Bahnsen, chief investment officer at The Bahnsen Group, a $3.6 billion wealth management firm. “It is starting to feel very much like this is the moment when the market has had enough with stocks that were trading at excessive valuations.”

While analysts are dialing back their optimism, they haven’t completely capitulated — their forecasts still imply an average climb of 48% in the next year for the FAANG stocks. The Nasdaq 100 is projected to climb 33% over the same period and the S&P 500 is seen rising 25%. Apple is the only one of the five for which analysts have raised their average price target this year.

“There are names like Facebook that are trading well under a market multiple and which have potential for growth,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading.  “If you have 100% cash, it is probably time to put some of that to work.”

Tech chart of the day

Netflix Inc.’s stock-market value again surpassed Walt Disney Co.’s at the end of last year as the streaming race heated up. However, Netflix has since reported two consecutive disappointing quarters. The once high-flying stock has fallen 70% this year, the biggest drop in the S&P 500 index. Its market value now stands at $80.7 billion compared to Disney’s $200 billion.

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  • Democrats in the U.S. Congress should press ahead and rein in tech giants as the companies seek to stall antitrust laws by arguing Americans care more about privacy than competition, advocacy groups said
  • Zoom Video Communications Inc. is likely to be a prime beneficiary from a “rip and replace” cycle for the enterprise communications sector, Ark Investment Management’s Cathie Wood says in a tweet
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  • Bill Gates said interest rates are likely to rise enough to cause a global economic slowdown, triggered by Russia’s invasion of Ukraine and fallout from the Covid-19 pandemic
  • Ford Motor Co. is selling 8 million of its shares in electric-pickup maker Rivian Automotive Inc. as an insider lockup expires Sunday, according to CNBC’s David Faber
  • Nippon Telegraph & Telephone Corp. is transferring its overseas business unit to networking and data subsidiary NTT Data Corp.
  • Shopify Inc. dodged privacy claims brought by an online shopper who alleged that the e-commerce platform collected his sensitive private information without his consent in violation of California law, after a federal judge threw out the proposed class action

© 2022 Bloomberg L.P.


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Valuations, even for companies with solid operating cashflows, got a bit nuts.

Have a look at Nasdaq 100 PE ratio, price/sales especially and for horror show price/free cashflow ratios over time. Got out of whack late 2019 already, went higher now correcting.

And that is for the 100. If you look at specific basket cases with no profits and negative cashflows it would be even worse.

I got completely out of all equities except one share between late 2020 and early 2021. Felt like a fool, but many stocks now starting to look reasonable again.

End of comments.




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