Eq: Tech

(San Francisco)

One of the questions swirling in the back (or front!) of investors’ minds is whether big tech megacaps are overvalued. They have had a stellar run this year and are trading at rich multiples, which has led to fears of overvaluation. On the other hand, they still seem like they might be the best growth play in the market. At the end of September one could argue things had gotten out of hand. FAAMG stocks were trading at 35x earnings while the rest of the S&P 500 was at 12x, the widest gap since 2000. However, since then fortunes have reversed, with the spread now only 31x to 20x.


FINSUM: So the big question is whether the shrinking of the spread means there is margin for FAAMG growth, or it is a part of a larger trend towards valuation parity? We think it depends on the regulatory path that new administration takes.

(San Francisco)

The anti-trust probe into Google elicited little more than a shrug from markets. Investors seem to think this just Washington saber-rattling. However, what is not well understood is that the probe is not just a risk for Google, but a major one for Apple. Apple is intimately connected to the case the DOJ is trying to form. In particular, Google pays Apple billions of Dollars a year to be the default search engine on iPhone, a fact which the DOJ has centered its case on. That money flows into Apple’s services unit, which has been its biggest growth driver in recent years. According to an analyst from Bernstein “There’s a risk, if you play it out, that there actually could be more financial impact to Apple than there is for Google”.


FINSUM: The market seems to have fundamentally misunderstood the risk here. Google got the headlines, but Apple potentially has even bigger risk.

(San Francisco)

There are rising fears about the potential over-valuation of big tech megacaps. While they have risen very strongly this year, their P/E ratios are not the only worry. Regulations are also weighing on investors’ minds, especially after the announcement of the anti-trust probe by the DOJ into Google. That has not stopped the stocks from rallying, however. Most investors are betting that the government’s numerous overtures about anti-trust moves (which have come from both sides of the aisle) are merely saber-rattling.


FINSUM: As it concerns large cap value versus big tech stocks, the answer is simple—it seems like time to buy both. Big tech may keep rising, but there is enough fear to keep other large cap stocks rising as we enter a prolonged recovery, as they have been for several weeks.

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