Overview
While investors have fretted over higher US interest rates, a slowdown in China and weaker emerging markets, it is the threat of increased regulation and worries over the escalating US-China trade war that are now driving the retreat from the major technology names. Semiconductor stocks have also been hit by antitrust accusations by China against the world’s top three chip makers.
But the overall long-term outlook for the sector is still very positive, and these previously expensive stocks are now trading at relatively cheap valuations even on near-term fundamentals.
FAANGs nosedive
Shares in all the big technology stocks have taken a beating, falling by 20-35 per cent from their recent highs.
Note: Rebased to 100 at Nov 24, 2017
Source: Refinitiv, Fidelity International, November 2018
Source: Refinitiv, Fidelity International, November 2018
Apple, in particular, has been hit by a combination of cyclical and structural headwinds. Tariffs and the strengthening US dollar are making iPhones more expensive, while on the structural side, customers are taking longer to upgrade their iPhone models.
While it is unclear how long these issues will persist, they do create uncertainty in the earnings trajectory for a stock that is very much driven by earnings momentum. But looking over the next two to three quarters, customer loyalty remains high and the company’s 500 million-plus customer base is still under-monetised. Apple has so far only focussed on selling new iPhones, neglecting the opportunity to sell additional services to these users - so there is potential to scale up in this area as it seeks to cash in on existing users. Also, due to its pro-privacy stance Apple is relatively less impacted by the regulatory concerns faced by the other FAANGs.
The different FAANG stocks will be influenced by regulation in different ways. For Facebook increased regulation is now almost a given and has already been priced in. But for others, such as Amazon, the regulatory factor is not yet quantifiable and can have a huge impact on discounted cash flows and therefore valuations.
The overall macro environment is also key. An aggressive period of monetary tightening by the US Federal Reserve would unsettle the equities market as a whole in 2019. The FAANG stocks, making up a large proportion of the index, could experience a more material sell-off compared to current levels as a result.
Long-term structural drivers still sound
However, despite these worries, we believe that the sector’s positive long-term structural drivers remain unimpaired, and there are compelling technical reasons to be optimistic. For instance, on enterprise value (EV) to forward sales multiples, Alphabet (Google) is the cheapest it has been for three years.
Source: Refinitiv, Fidelity International, November 2018
There is still plenty of runway for growth. For example, In the case of Amazon, only 10 per cent of US retail is online so there is room to advance.
Overall, we believe the fundamentals are still intact, and the recent sharp moves could represent an opportunity.
.Source: Refinitiv, Fidelity International, November 2018
Past performance is not a reliable indicator of future returns
