The Bloom Is Off Market’s Romance with FAANG Stocks


Investors have fallen out of love with FAANGs.

The biggest tech stocks – Facebook, Amazon, Apple, Netflix and Google (via its parent Alphabet) – have shed more than $400 billion in market value since their peak a year ago, when collectively they were worth some $3.7 trillion. (Alphabet hit its all-time high a little later, in April.)

Their once-inexorable rise was a key driver in a stock market that has remained buoyant for a decade, setting new records every few months and they now account for nearly 20% of the capitalization of the S&P 500. Those who had the good fortune to invest in any of these stocks early have seen returns in thousands of percent, but the stocks have been unable to recover their peak valuationsOpens a new window over the past year.

Fund managers sensitive to returns cannot sit on stock positions that aren’t making new gains. Stocks that gained a loyal following for their seemingly unlimited potential are now losing fans, as managers trim all but Alphabet to underweight in comparison with their benchmarks.

Going the way of the Nifty Fifty?

Peter Thiel, a partner at Founders Fund and an early backer of Facebook, has sold the fund’s entire position in the social networking company and virtually all shares held elsewhere. The former PayPal CEO, who is on the Facebook board, now owns only 0.1% of the 44.7 million sharesOpens a new window he held when the company went public in 2012.

FAANG seems ready to join other driving forces of the past, dating back to the Nifty Fifty in the early 1970s through the favorites of the first tech boom in the 1990s: the Four Horsemen — Microsoft, Intel, Cisco and Dell (or Oracle).

Partly to offset their stock doldrums, Facebook and Alphabet have stepped up their stock buybacks. When a company buys back its own stock, it tends to boost the price and compensate for the dilution from stock and option grants tech companies like to give employees.

Boosted by buybacks

Alphabet, for instance, bought back $3.6 billion of stock in the second quarter and $6.6 billion in the first half, both new records — but stock rewards to employees totaled $5.5 billion in the first six months of the year.

Investors like buybacks and want the company to go further. It had $121 billion in cash on hand at the end of the first halfOpens a new window , more than the market cap of most S&P 500 companies.

Facebook only started buying back its own shares in 2017, but spent $12 billion on buybacks over the 12 months from July 2018. It still has $45 billion in net cash on hand.

While many analysts still see considerable upside potential in the FAANG stocks, they have each run into particular issues that dampen investor enthusiasm.

Facebook plunged last year after it emerged the company had shared user data with consulting firm Cambridge Analytica that was then used to drive political campaigns in social media, launching the stock on a roller-coaster ride that has left a legacy of mistrust, especially, but not only,Opens a new window among European authorities.

Fraying loyalties

Amazon registered a rare miss on expected profits in July, ending its string of record quarterly earnings as a result of rising costs. The dominant online retailer no longer has the luxury of running a profitless business to gain market share, as it did during its early years.

Apple seems less likely to maintain momentum with a steady stream of new products. It is shifting to services and subscriptions, but it has to earn investor confidence in the new business lines to clock up further valuation gains.

Netflix registered its first decline in US users in almost a decade, putting pressure on the stock price. It also faces new competitors in the streaming sector it pioneered and dominates — notably Walt Disney, which is reclaiming many of the series that made Netflix popular for its Disney-Plus launch set for November.

Alphabet has kept investor favor so far, but Google faces constant scrutiny from antitrust authorities in Europe and cannot afford a stumble now that the group’s invulnerability has been pierced.

Wall Street has a long list of proverbial remarks about becoming too attached to a stock. Basically they all amount to something like “Romance Stocks: No Matter What, Don’t Fall in LoveOpens a new window .” It looks like the old adages have not been forgotten – even for the FAANGs.