Many investors remember the explosive growth of Internet startups and the subsequent bursting of the dot-com bubble back in the early 2000s. Who can forget Yahoo and America Online? After reaching tech titan status in the late 1990s, they’re no longer independent companies—both are now owned by Verizon Communications. How about Pets.com? A high-profile marketing campaign, including a Super Bowl ad, made its sock puppet famous. But it also lost money and liquidated in November 2000.
On the other hand, who can forget that many investors in the late 1990s thought Amazon’s stock was extremely overvalued. Who today wouldn’t want to have held onto it?
Nearly 20 years later, we’ve entered a new age of innovation and impressive growth in the technology sector. Disruptive technologies are transforming the way people around the globe communicate, shop, and enjoy their leisure time, and they’re challenging tradition-bound industries that have existed for decades.
Despite recent volatility in the sector, overall technology stocks remain strong performers. Should investors worry about another tech bubble? It’s something to consider, but keep in mind that the technology sector isn’t monolithic. Technology companies have diverse markets, business models, and revenue sources. Their stocks won’t behave uniformly. In terms of valuation, technology stocks overall are much less expensive now than during the dot-com era. The price-to-earnings multiple of the technology sector is below the long-term average of the overall market and meaningfully lower than it was in the early 2000s. So the value of tech-company stocks may not be as overblown as some believe. And maybe some high short-term-focused valuations are warranted for companies that have the right stuff to thrive and transform.
Facebook, Amazon, Apple, Netflix, and Google (Alphabet), referred to in the financial media as the FAANG stocks, would seem to fit the bill. Their products and services dominate their industries, and their stock prices have soared. They represent about 11% of the S&P 500’s market cap, yet over the past year and a half, they’ve contributed 40% of the index’s return. They sit at the vanguard of recent disruptive innovation, but have they become overvalued? To answer that question, let’s look at their businesses and growth prospects.
Facebook, with its ubiquitous online social network, has profoundly changed how we interact with friends and family, and the way we consume news and entertainment. As it has solidified its dominant position in Internet-based social media, the company has increased its appeal to advertisers and posted strong historical growth in revenue and monthly active users. While some investors may worry about privacy, the use of personal information, and user engagement, others are focusing on the company’s long-term opportunities for further growth, as well as its other business lines (e.g., WhatsApp, Messenger, and Instagram) that may provide new avenues for cash flow.
Amazon is still around, and stronger than ever. It’s transformed how, when, and where we shop. It’s the leading online retailer worldwide, and its sales and customer growth have been strong. While growth in the traditional global and U.S. retail industry is steady, e-commerce sales continue to increase rapidly and comprise an ever-larger portion of overall retail sales as brick-and-mortar sales decline. There are rumblings that Amazon is getting too large too quickly, and that it may face a regulatory battle down the road. In the meantime, the company is expected to continue its rapid retail growth as e-commerce expands globally. It also has a leading position in the web services market.
Apple has developed sleek, eye-catching computers and mobile devices that have given consumers groundbreaking new ways to access, consume, monitor, and share information, images, and entertainment. Its iOS operating system is prolific across the global mobile phone, tablet, and personal device landscape. While iPhone sales have moderated, Apple maintains a leading position in the smart phone, tablet, and wearables markets, and average selling prices remain high. The company’s various devices work together seamlessly, keeping customers loyal and coming back to buy more. It’s also benefiting from rapid growth in its services business—iTunes, App Store, Apple Care, and Apple Pay.
Netflix has transformed how, where, and when we consume entertainment with its subscription-based streaming media service and burgeoning lineup of television programs and movies. As the Internet has disrupted the media industry, Netflix has generated impressive subscriber growth, and it’s looking for new markets overseas to keep sales expanding.
Google (now Alphabet) has sparked a seismic shift in the way we access information and spend money on advertising. Its dominant position in Internet search has fueled strong sales and earnings growth worldwide. Google also is poised to profit through its YouTube video-sharing website, as well as its non-advertising businesses, including Google Cloud (computing services), Google Play (digital app and media store), Waymo (autonomous vehicles), and Verily Life Sciences.
Given the attractive, long-term growth opportunities for these companies, maybe their stock values aren’t unreasonable. The FAANG companies have built platforms with millions, even billions, of users. From their existing platforms, they’ve layered on new services that present meaningful additional opportunities. For companies with so many avenues of growth, doesn’t a longer-term perspective make more sense?
Hindsight is always 20/20, but investing in Amazon in the 1990s now looks to have been a smart move. Will investing in today’s durable disruptors look much the same 20 years from now?
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Source: https://www.pgim.com/pgim-investments/insights/investment-perspectives/have-the-faang-stocks-lost-their-bite