The long-awaited (long-feared?) shake up of the S&P 500’s sectors will occur soon, and there is a lot of focus on how the tech sector, as traditionally defined, will change. Google and Facebook will be making the switch out of tech and into the new communications services sector. Netflix, as well as Walt Disney, Ford, and Nike will be joining them. There is some fear about the volatility that will be caused as big index trackers have to change their holdings on September 21st. Overall though, it seems like tech stocks (as traditionally thought of) will be winners, as having them distributed across multiple sectors will avoid the sector-weight limits many asset managers face.
FINSUM: Tech stocks will likely do well, but so will the companies getting grouped with them. As one analyst pointed out, AT&T and Verizon joining Google and Facebook is kind of liking outsiders getting invited to the cool kids’ party, which may help their share prices.
Faangs and the tech sector more generally have had a tumultuous year. There have been a lot of fears over regulation, valuation, and data breaches. Yet, on the whole, the performance has been strong. However, many investors are now turning against the faangs in a big way, as short bets against it have soared recently. There is now a $37 bn short position against the group of companies, up 40% in the past year. Amazon is the most shorted single stock, with around $10 bn of short interest against it. Faangs have accounted for almost half of the Nasdaq’s rally above 8,000.
FINSUM: The short interest is understandable given the lofty valuations, but the issue is that the underlying businesses look quite strong, which makes us doubtful there is going to be a coordinated faang crash of any grave magnitude.
Apple just crossed the trillion Dollar threshold. Shares have been rising, up over 27% this year, on strong sales figures. Everything seems good, right? Think again, says Barron’s, as it believes the stock could be in for a “clobbering”. The reason why is that Apple’s recent success with the iPhone X may have weakened its prospects for 2019. Because there is a longer and longer timeline between phones that have the dazzle to get customers to actually trade up, currently good iPhone X sales may be sapping demand for 2019, meaning the next few quarter’s earnings might be quite disappointing.
FINSUM: This makes sense to us. Customers only have so much wallet share for smart phones, and the iPhone X took a lot of that this year, which means the next several quarters could be lean.
Talk about comments coming right from the source. Microsoft CEO Satya Nadella went on the record this week telling the market that tech companies should “expect” regulation. Nadella walked through current areas of tech and regulations, like facial recognition or GDPR, and explained their implications for the industry. He said that “As tech becomes more and more pervasive, I think for all of us in the tech industry we should expect—whether it’s on privacy or on cybersecurity or even ethics or AI—government and regulatory bodies to take interest in it”.
FINSUM: We think the writing is on the wall that tech is going to face some form of regulation, especially given that the Trump administration is rather hard on the sector. The question is when, not if.
The market has become very worried about tech valuations. Even with recent selloffs, tech stock prices are very rich. However, despite the broad fears, some fund managers are ditching the concerns, as they think the obsession with P/E ratios is short-sighted for tech. In particular, one manager says that he likes to think about how tech companies will look as mature businesses, and thus judging them by their current P/E ratios is unfair.
FINSUM: We agree that it is hard to assess tech stocks according to standard P/E ratios. They are growing much faster, have much higher margins, and have a brighter future than stocks in any other sector of their size. Accordingly, it is hard to contextualize their P/E ratios because there is no benchmark.