Exuberant technology stocks have been the dominant driver of global equity markets in the past decade, as the MSCI World IT sector has outperformed the overall market by as much as 200% since March 2009. Notably, the world’s reliance on online and electronic devices has meant that the technology market has been in robust shape with the tech-heavy NASDAQ index seeing returns outperform the S&P 500, and favoured FAANG (Facebook [FB], Amazon [AMZN], Apple [AAPL], Netflix [NFLX] & Google [GOOGL]) stocks reporting record-breaking highs.
But some strategists have observed numerous similarities between the past five years and the 1990s dot-com boom that indicate another tech bubble might be inflating. The cracks began to show in February 2018 when the NASDAQ declined by nearly 11% from its January highs, and plummeted again in October and November 2018 amid a wider tech sell-off, with as much as $1tn being wiped from the combined value of the FAANG stocks.
Amount by which the MSCI World IT sector has outperformed the overall market since March 2009
With 2019 expected to bring slower global growth, few analysts expect gains from the FAANGs at the same level as in early 2018 – although Morgan Stanley has included Google, Amazon and Netflix in its list of annual secular growth stocks that could grow strongly, independent of global economic conditions.
But there is also a growing interest in alternatives to the FAANGs, which have the potential to be the new top gaining tech stocks.
CHALLENGES AND OPPORTUNITIES
The correction, rebound see-saw
After admirable efforts to stage a rebound, tech stocks are still way off their all-time highs and with dim forecasts for 2019, the bubble may still burst.
Technology stocks are expected to face more regulation headwinds in 2019, which could spell a massive slowdown for the heavy-weight FAANG stocks. All five companies have already seen their share prices steadily plummet throughout the third quarter of 2018.
Matt Maley, equity strategist at Miller Tabak, is cautious on the FAANG stocks for next year. He tells Opto that looming regulations will create headwinds for a long time. Nervous investors have had their confidence in tech stocks shaken, if not shattered, throughout 2018’s volatile backdrop and with forecasts predicting the convergence of macro factors in 2019, they might still be fleeing the sector yet.
On the other hand, some analysts are adamant of a bounce back. Jonathan Golub, chief equity strategist at Credit Suisse, has a lot of confidence in tech stocks and expects a “very hard bounce” in the near term. He argues that October’s sell-off was a technical one that was less about fundamentals and more about positioning.
Credit Suisse’s investment outlook adds that technology will remain a strong growth driver in 2019, especially if economic growth stabilises.
THE CMC VIEW
The US tech sector, which outperformed the broader market early in 2018, is now the most vulnerable to a potential earnings reversion. Take Apple – once the world’s most valuable company with a $1.1tn market cap – has lost nearly a quarter of that value in October and November 2018, following a disappointing earnings guidance and weaker iPhone sales outlook amid intensified competition from its rivals Samsung, Huawei, Oppo and Vivo. Apple’s key suppliers are also adjusting their earnings forecast due to slashed iPhone production orders, exerting a ripple effect on its entire supply chain.
The not-so-mighty FAANG stocks?
While tech stocks remain under pressure, the FAANG group wasn’t able to stage a sustained rebound rally at the end of 2018 as investors were unimpressed with Q3 earnings. Despite facing increasing competition from the streaming industry and trading near its historical average, Netflix still reported strong subscriber growth, its most important metric when valuing its stock.
Amazon experienced a mixed financial report that saw online sales slow for the fourth consecutive quarter and a cautious Q4 outlook, however it is still a force to be reckoned with. This is the second public company in the world to hit the $1tn market cap, albeit briefly, and with an ever-diversifying portfolio as a value driver, it is still set to disrupt other sectors, especially with its Amazon Web Services in the trending cloud market.
Meanwhile, Apple has fallen far from its former stature, and said it will stop disclosing unit sales amid slowing iPhone sales forecasts and a plummeting market cap.
For Facebook, slower user growth and increased digital regulation due to scandals involving data breaches have painted a worsening picture for 2019. Despite these headwinds, the company has a valuable communication portfolio to fall back on, including the likes of WhatsApp and Instagram.
2019 looks to be the year a monsoon of long-awaited tech IPOs come to market – provided they aren’t spooked by the downturn.
Airbnb has hired Amazon vice president Dave Stephenson as CFO ahead of its proposed IPO. As a profitable unicorn, Airbnb stands out as a rare thing. It made almost $100m in profit in 2017 on $2.6bn in revenue and booked more than $1bn in Q3 2018.
Uber’s main rival in the taxi ride-sharing industry, Lyft has hired JP Morgan Chase [JPM] for its slated IPO that could value the company at $15bn after it raised $600m in funding in 2018. Lyft’s Q3 losses grew to $254m from $195m year-on-year, yet revenue rose to $563m from $300m. Lyft has also benefitted from Uber’s various PR debacles.
Pinterest is expected to go public in the middle of 2019, and currently has a valuation of between $13-15bn. The company’s mobile search capabilities are enticing advertisers, and it is expected to double its revenue in 2018, nearing $1bn. However, this is some way below the estimated $2.8bn projected for 2018 in financial documents obtained by TechCrunch in 2015.
The productivity service, which provides an instant messaging platform designed to take on email, now has more than 8m daily users and could reach a value of $7bn at its IPO. The application can be used by individuals or companies, for one-on-one conversations and group chats. It has raised $1.2bn since it was founded in 2009.
Uber is expected to go public at $120bn. It has bounced back from a string of scandals in 2017, claiming 65% of the US ridesharing market in early 2018. Though not confirmed, Uber is reported to be selling between $400m and $600m in stock at $40 per share. The company has received $20bn in private financing since its 2008 launch; investor tolerance for loss-making tech unicorns will be significantly tested by the IPO.
The diamond in the rough may well be Alphabet [GOOGL], which has been caught in the crossfire of the tech sell-off. Its investments across several early-stage businesses in sectors such as cloud computing, autonomous cars and AI strengthen its core earnings.
Microsoft: A FAANG stock challenger
While the market fixates on the blue-chip tech stocks, Microsoft [MSFT] is rising up as a powerful growth stock with a lot of potential to be a frontrunner in 2019. The company owes its stunning rise to its cloud service leader, Azure, which grew by 76% in Q3 2018 and is expected to soar as 60% of enterprises are due to move IT systems to the cloud by 2019 as part of digital initiatives.
Azure growth in Q3 2018
With Microsoft surpassing Apple’s market cap and forecast by some to surpass $1tn in 2019, the FAANG acronym might have to make room for more letters at this rate. As long as AI and data continue to influence the fate of equity markets and record double-digit returns, Microsoft will likely remain a resilient technology stock.
A number of potential new – or replacement – letters to the acronym are likely to emerge, led by Microsoft. An avalanche of tech IPOs, from Airbnb to Uber, are expected in 2019 – could the recent downturn mean they will be better value? Debate rages as to whether the FAANG stocks will bounce back in 2019, or dip further.