US Tech stocks: Why are US Tech stocks hitting all time low?

When we talk about big tech companies in the US market, we often hear of FAANG. It represents Meta (earlier known as Facebook), Apple, Amazon, Netflix, and Alphabet (earlier known as Google). Over the years, these stocks have given exceptional returns to investors. However, in 2022, most of these companies corrected by a large percentage. Should you take a fresh entry at current levels, buy more, or exit? Let us try to find out more about these stocks.

How big are these companies?

As mentioned earlier, these stocks have fallen significantly. Even after a decline in 2022, the market capitalization of these companies is around $3 trillion. How big is it? According to data from the World Bank, the UK's GDP was 3.19 trillion pounds. 

How much have these companies fallen?

Facebook (Meta) stock was trading at over $300 per share at the start of the year. Today, it is below $90. The same story is true for other FAANG stocks. Netflix stock has fallen over 50%, Amazon stock down 45%, Alphabet (Google) shares fell up to 40%, and Apple share price has fallen by at least around 24%. The table below reflects the total fall in 2022 and the lost market capitalization in 2022 (approx numbers).

Why are tech stocks falling?

Below are some reasons for the fall in the share price of FAANG:

• Expensive valuations: These companies are facing the same issues as other businesses - they received a massive leg-up from aggressive consumer spending during the pandemic. It was believed that the demand would continue. Now things have returned to normal, consumers have rationalized their spending, and FAANG is faced with the prospect of adjusting. 
• Poor results: All these companies (except Apple) have delivered poor results for the September quarter. Even the guidance for the next quarter does not look promising for most of these companies. The recent fall is attributed to weak quarterly results and guidance.
• Fall in advertising revenue: Some FAANG companies are to some extent dependent on advertising revenue. Most of these companies are finding it difficult to grow sales as digital advertising and other revenue streams slow because of the economic slowdown.
• Rate hikes and recession fears: Investors are concerned a recession could be on the way as the Fed continues to raise interest rates to combat inflation. The central bank has been attempting to ensure a 'soft landing' for the US economy where inflation is reigned in, but GDP growth continues. Such a situation is not good for stocks, including FAANG. These stocks are sensitive to rising interest rates due to discounted cash flow (DCF) models. DCF models forecast future cash flows and then discount those flows back to arrive at a value for what they are worth today for a company. It implies that as interest rates go up, the present value of a company’s future earnings goes down. 

Should FAANG stocks be in your portfolio?

Investors need to understand one point - no other business in the near future can replace the advertising business of Google, replicate the business model of Amazon, and have a brand value similar to Apple's.

Despite the fall in 2022, these stocks have given exceptional returns to investors in the last five years. In the last 5 years, Apple has given more than 220%, Amazon has delivered 60%, and Netflix has given nearly 40% returns. Therefore, these companies have the potential to deliver good returns when things get better for them. 

However, financial experts believe that, for now, you don't want them to be overweight in your portfolio. It implies that they should not take up a higher allocation than they should. 

How much should you own? It depends on your risk profile and investment duration. If you have a short-term investment horizon, you should not invest in them as they may not deliver returns in the coming quarters.

What should investors do - analysts view?

Meta (Facebook) share price: Deepdive

Facebook: Morgan Stanley downgraded the stock, after its recent results citing higher spending. Analysts slashed their price target to $105 from $205. They expect the company’s issues to persist as Meta continues to increase spending to build out its AI capabilities.

Amazon share price: Deepdive

Amazon: Morgan Stanley analysts slashed their price target for Amazon to $140 per share from $175 after the recent quarterly earnings. The reason cited by the brokerage is that the firm’s e-commerce and cloud businesses both slowed 'faster than expected' in the third quarter. They still believe Amazon will gain market share from the competition whether a recession comes or not, and have maintained an OVERWEIGHT rating (a BUY call).

Apple share price: Deepdive

Apple: The analysts at Tigress Financial Partners have kept a BUY rating for Apple shares. They believe that ongoing innovation, new product introductions, and increasing Service revenue will continue to drive long-term shareholder value creation.

Netflix share price: Deepdive

Netflix: Wells Fargo analysts say that the dark days for Netflix are over - it appears the worst is behind. Netflix became un-ownable when net adds turned negative, and while there will always be flows and ebbs in the slate, it’s now tough to see sub-loss in future years, even if churn remains elevated compared to history. They have given a target price of $300 per share.

Alphabet share price: Deepdive

Alphabet: Credit Suisse adjusted Alphabet’s price target from $134 to $128 and has kept its OUTPERFORM rating. Also, Morgan Stanley lowered its price target from $135 to $125 but kept its ‘overweight’ rating.

Microsoft share price: Deepdive

Microsoft: Morgan Stanley is upbeat Microsoft's long-term prospects and hence has kept an Overweight rating but has cut price target from $325 to $307.

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.