Investors appetite for major technology and internet
stocks resembles that of buyers back in 1999 they
cant get enough.
Most are targeting a handful of stocks Facebook, Amazon, Apple, Microsoft and
Alphabet, Googles parent company potentially
inflating shares beyond what theyre worth, according to a
research report Friday from Goldman Sachs Group. Investors are
focusing on the low volatility of these stocks, without
considering major risks, Goldman equity analysts said.
The companies have added $600 billion in market
capitalization this year, or the size of Hong Kong and South
Africas combined gross domestic product, according to the
report. The analysts are concerned that passive investors are
trading the stocks believing volatility will remain low, even
as expectations for fiscal stimulus and "pro-cyclical policy,"
which were priced into the market during the fourth quarter,
have fallen by the wayside.
"The fear is that if fundamental events cause volatility to
rise, these same passive vehicles will sell and exacerbate
downside volatility, Goldman analysts Robert Boroujerdi,
Jessica Binder Graham and John Marshall wrote in the report.
Low realized volatility can potentially lead people to
underestimate the risks inherent in these businesses including
cyclical exposure, potential regulations regarding online
activity or antitrust concerns or disruption risk as they
encroach into each others businesses.
Major buyers of the so-called FAAMG stocks include hedge
funds, with all five companies among the top 10 stocks in
Goldman's "Hedge Fund VIP basket," or the firm's exchange-traded fund that mimics
hedge-fund holdings, according to their research note. A Novus Partners report this week showed
that 20 percent of hedge fund managers it tracks hold Facebook
shares, while mutual funds are also getting into the game.
Right now, if you compare hedge fund holdings to
mutual fund holdings," mutual fund managers are more overweight
a nearly identical group of companies known as FAANG, or
Facebook, Amazon, Apple, Netflix and Googles parent
company, said Stan Altshuller, chief research officer at
Goldman swapped Netflix out for Microsoft in its report
because Netflix no longer has a dramatic impact on
the S&P 500. Microsoft has a far larger market cap of about
$540 billion, compared to $68 billion for Netflix, based on
their closing share prices Friday.
FAAMG and the top five tech, media and telecom companies
held during the 1999 tech bubble hold nearly the same weight on
the S&P 500 index, the Goldman analysts said. Whats
different is that FAAMG holds eight times more cash and the
group's valuations are more stable - their shares trade at 23
times earnings, compared with a price-to-earnings multiple of
60 times for the tech bubble stocks.
But the group of five companies isn't as profitable as the
top five held in 1999 tech bubble, perhaps fueling some concern
about their market value.
The recent run in large-cap tech stocks has evoked
memories (nightmares?) for some investors of the last euphoric
NASDAQ run, the Goldman analysts said.