Goldman Warns That Tech Investors Are Ignoring Risks

Lulled by low volatility, investors have been hungry for Facebook, Amazon, Apple, Microsoft and Google’s parent company.


Investors’ appetite for major technology and internet stocks resembles that of buyers back in 1999 — they can’t get enough.

Most are targeting a handful of stocks — Facebook, Amazon, Apple, Microsoft and Alphabet, Google’s parent company — potentially inflating shares beyond what they’re 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 Africa’s 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 other’s 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 Google’s parent company, said Stan Altshuller, chief research officer at Novus.

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. What’s 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.