Once the investor highfliers and the darlings of Wall Street, FAANG stocks today look no more attractive as the five stocks took a beating this year. With the Nasdaq down about 28% so far in 2022, Apple (AAPL) shares are down about 16%, making the iPhone maker the best performer among the big techs. Microsoft (MSFT), Amazon (AMZN), Netflix (NFLX), Facebook-owner Meta (META) and Google-parent Alphabet (GOOGL) have all had a nightmare this year.
At 28%, the technology sector commands a lion’s share of the S&P 500 index. This is precisely the reason why any fluctuation in FAANG stocks moves the entire market drastically.
What’s behind the massive fall in tech stocks?
Wall Street’s tech giants have been among the top-performing investment sectors over the past two decades, but the sector has taken a hit this year, where stocks are down over a half from their highs seen in January 2022. Higher interest rates have largely driven investors out of these risky assets. Increased cost of borrowing ideally hurt the discounted cash flow valuations of these large growth stocks which decreased the future value of their cash flows; thus impacting their margins and profitability.
Additionally, these higher rates have impacted tech earnings, reflected in their third-quarter earnings which came in October against a backdrop of soaring inflation and Fed’s hawkish monetary policy. These large tech companies together lost over $350 billion in market cap post their earnings last month after the companies reported a slowdown in revenue growth and gave poor guidance for the current quarter and their full year.
Stocks that have been trading at premium valuations are being re-priced, which is why we are seeing corrections in the rate-sensitives sectors and stocks this year. Hence, the big techs are being adjusted to the reality of being fairly valued, which is less speculative and more realistic. The excess froth in these risky assets is coming off sharply in 2022.
Should investors look at big tech stocks at current levels?
Wall Street’s big tech stocks have been battered this year, and the overall tech earnings fell 1% year-on-year in the most recently reported quarter. The revisions for the fourth quarter have been cut by nearly 10%. Broader macroeconomic uncertainties and the slowdown in digital advertising are weighing down on the tech sector. Several tech giants like Meta Platforms and Amazon have already announced layoffs and there seem to be more job cuts in the coming months.
Nevertheless, when we look at the long-term 10-year returns (Table below), there is still plenty to like about these stocks. The tech sector may likely see a bounce back in 2023 once the Fed pivots, meaning if the Fed reduces interest rates next year from its current ongoing hawkish monetary policy. Long-term investors do understand that timing the market is not important but the decision to buy or sell these stocks entirely depends on their valuations to see if the share price of the company accurately reflects their intrinsic value.
Last week’s rally seen in Wall Street and particularly the tech-heavy Nasdaq index, which soared over 8% for the week ended Nov 11 gained the most since April 2020. Rate-sensitive technology and growth stocks led the gains, with Amazon, Meta, and Alphabet surging anywhere between 7%-20% on a weekly basis after the better-than-expected inflation numbers calmed the markets and raised hopes that the U.S. Federal Reserve may likely slow the pace of rate hikes in the upcoming FOMC meetings.