There have been a lot of worries about the tech sector this year. Besides valuation, the big fear has been the threat of regulation. Well, those anxieties are proving to be correct as the Department of Justice has just officially announced that it has opened a probe to figure out whether the tech sector is smothering competition. The broad antitrust investigation did not name companies in particular, but said it would focus on “search, social media and some retail services online”.
FINSUM: This is quite a worrying development, but it is hard to say how exactly it may play out. There does seem to be popular momentum behind further regulating big tech, which means lawmakers may be more emboldened.
A year ago you were a considered a maniac if you didn’t have your portfolio loaded with FAANGs and other tech stocks. What a difference a year makes! Tech stocks are now largely out of favor after a rough year that has underperformed the S&P. There are a lot of fears of regulatory scrutiny and slowing financial performance. The tide has turned so much against the stocks that it is fair to call them a contrarian bet.
FINSUM: It sounds quite ridiculous to call some of the world’s most popular stocks over the last few years “contrarian”, but it seems true at this point. It appears it might be a good time to buy, though regulatory fears may prove legitimate.
A year ago, the FAANGs were flying high. In the previous twelve months they had risen 52% against the market’s 13% growth. The group of tech stocks has since suffered, underperforming the S&P 500 in the last year. In fact, a group of very conservative stocks have been leading the way. Call them the “WPPCK” (not as catchy, we know), which is comprised of Walmart, Procter & Gamble, Pepsico, Costco, and Coca-Cola. This group has risen 27.1% in the last year versus the S&P 500’s 7.2% gain and the FAANGs’ 5.7%.
FINSUM: It is hard to imagine a less flashy group of stocks than these, but they have been strong and steady, which seems like a good formula for this unpredictable market.
Looking for the best big tech stock to buy? Look no further than Google. Alphabet, the parent company of Google, is a better deal than it seems on paper right now. Yes, it is trading for 24x forward earnings, a 50% premium to the S&P, but it has some very strong redeeming qualities. Get this—revenue growth at Google has raged from 21% to 25% per quarter for the last 14 quarters. Further, the important thing about that valuation metric above is that it does not include Google’s massive $105 bn in cash. If you strip that out, along with the loss from its “moonshots” division, and Alphabet is trading at 19x earnings—not bad for a company with that kind of growth! The stock has been beat up lately because of significantly higher spending, which has hurt margins.
FINSUM: Okay, so margins are down a bit, but the c-suite says they are investing for the future. We think this may present a good buying opportunity. We never thought we’d be talking about a FAANG as a value stock!
There has been a lot of momentum flowing against tech stocks right now, and especially the FAANGs. Facebook has taken a great deal of the pain, with numerous headwinds facing shares. However, the reality is that the company has a very solid underlying business, and the recent volatility means it also has an attractive valuation. According to Deutsche Bank, “We continue to view Facebook as the best risk/reward in large cap internet given the potential for core Facebook engagement to stabilize … and given the extremely attractive current valuation”.
FINSUM: Facebook has been going through a very rough period over the last year, but the negative news cycle is going to abate, and when it does, the stock seems likely to gain.