Are the FANGs still the place to be?

Is the great tech rally finally over? We suspect not, given the growth rates on offer and the possibilities offered by new technology. 

Facebook
Source: Bloomberg

The recent pullback in tech stocks, modest though it was, undoubtedly worried some that the great rally in the sector was over and done with. US tax reform was the topic of the day, and it was feared that the big names, such as Apple and Facebook, (many with large overseas cash piles) would not benefit as much as domestic US firms. Also in vogue was sector rotation, the idea that investors slowly move from one area to another over time, to take advantage of perceived undervaluations.

But it is far too soon to declare the end of the great rally in tech. Indeed, it may just be getting into higher gear. Free cash flow and earnings continue to rise at many of these firms, with Facebook being a prime example. Between 2013 and 2017, Facebook saw its share of web-traffic grow by over five times, exceeding 40%. Meanwhile, for Amazon, the forces of cloud computing and e-commerce will keep driving growth; as in so many things, the Bezos empire has established a virtuous circle that should help it retain a significant edge over its competitors.

Turning to Netflix; while its subscriber base in the US may be maturing, it is overseas growth that will drive it forward. Even its slightly more expensive pricing plans are not having much of a softening effect on demand; the October announcement that the $10 a month high definition plan would now cost $11, still prompted a jump in the share price. And then there is Alphabet (or Google, to complete the FANG acronym). It continues to benefit from the move to mobile platforms and web searches, and Google’s dominance leaves it well-placed to benefit from broader growth in the sector.

With the big names expected to grow earnings by 17-25% over the next year, it is far from clear why anyone would sacrifice this potential for a modest tax benefit. Valuations may be high, but relative to growth, the picture does not look too daunting. And which would you own? A plodding consumer stock with 7% growth a year, or a thoroughbred like Amazon with a remarkable future ahead of it?

Turning to the Nasdaq 100 index, we can see that the wobble of the past month barely puts a dent in the index’s broader rally. The recent all-time high of 6424 is likely to be breached in due course, the index having found strong support around 6226. Even deeper retracements, towards the 100-day or even 200-day simple moving averages (SMAs), would still likely constitute buying opportunities. 

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