October 11, 2021

Facebook, Apple, Amazon, Alphabet and Microsoft are not out of the woods

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Photo by JOSH EDELSON / AFP via Getty Images


Stocks of the top five tech companies have mostly recovered from their steep declines at the start of the week, but that doesn’t mean they’re out of the woods.


Facebook

(FB) plunged nearly 5% on Monday after a whistleblower released internal documents and three of its social media platforms temporarily went offline. Amazon.com (AMZN),


Apple

(AAPL), Microsoft (MSFT) and Alphabet (GOOGL) each suffered a decline of more than 2%. But with the exception of Facebook, the group managed to end the week in positive territory.

Still, the shares of the five tech giants are much cheaper than a month ago. Facebook is down 13.6% from its September 7 record, and Apple stock has fallen 8.8% since that date. All five, with the exception of Microsoft, have followed the


S&P 500

since September 7. (The index itself has fallen 2.8% from that day to date.)

But Big Tech stocks could be vulnerable to further pullbacks in the coming months.

The Federal Reserve has been hinting for months that it will start cutting its bond purchases by the end of this year and perhaps raise interest rates in 2022 or 2023. The bond market is already reflecting this expectation: the 10-year Treasury yield jumped to 1.61% this week, from a September low of 1.29%.

Rising yields are generally bad news for fast-growing tech stocks, as it would make their expected future earnings – often the basis of their high valuations today – – seem less attractive.

Even though the Fed’s policy change is already incorporated, the yield could continue to rise as it still looks low relative to inflation. The 10-year Treasury yield less long-term inflation expectations is currently below 0%. This means that investors in these bonds lose value when they factor in inflation.

The peak of the 10-year yield in 2021 was 1.75%, reached in March, and it is reasonable to believe that it could reach that level again. After more than doubling their prices since the pandemic, tech stocks already seem too expensive for that. When the 10-year yield was slightly above 1.75% at the end of 2019, the average valuations of members of the Nasdaq 100 were 24 times forward earnings. Today, that multiple stands at nearly 28.

The tech giants will also have a high bar to meet when it comes to earnings in the coming quarters. Driven by changing consumer behavior – more time on the internet – during the Covid-19 pandemic, tech stocks have enjoyed a successful year. But as the pandemic recedes, that tailwind will be gone and companies will have a harder time breaking their own records.

Although Big Five stocks tend to move in tandem, investors should be careful with the idiosyncratic risks of each of the companies.

Facebook, for example, continues to face pressures on both the regulatory and reputational fronts. Frances Haugen, a former data scientist at Facebook, testified on Capitol Hill on Monday, saying company executives were aware of its platform’s negative impact on users, but misled investors in their public statements. This is just the latest installment in the regulatory saga around the social media giant. While no such risk has materialized so far, Facebook shares have been affected by the bad headlines.

In a statement to Barron Earlier this week, Facebook said, “Every day our teams must strike a balance between protecting the right of billions of people to speak out openly and the need to keep our platform a safe and positive place. […]To suggest that we encourage bad content and do nothing is just not true.

Apple faces continued supply chain disruption and chip shortage. The smartphone giant will be in the spotlight on October 28, when its next earnings report is expected to be released. Apple is expected to reveal on this day how the new iPhone 13 ′s sales go so far, and how Apple plans to create new growth opportunities by leveraging its huge consumer base. While analysts expect strong earnings for the final quarter, those gains are likely already being factored in. This is the longer-term future that investors will look to.

As for Amazon, concerns have been expressed about a more general slowdown in e-commerce spending growth in the United States, especially given the difficult comparisons last year. Some investors are also concerned about whether Amazon has enough inventory to deliver products during the holiday season, if the current supply chain disruptions continue through the end of the year.

Shares of Facebook and Amazon are currently trading at multiples below their five-year average, while Apple and Microsoft are more expensive than the historical average. Google shares are listed at roughly the same level.

The outlook for Big Five tech stocks is important to the overall market, as they alone account for nearly 25% of the S&P 500. The size of these companies and the impact of the tech sector, ”wrote Tom Essaye of Sevens Report in a note last week.

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