FAANG stocks — an acronym for the world’s five biggest tech companies, namely Facebook, Apple, Amazon, Netflix and Google — have just started to demonstrate signs of an upcoming recession.
Amazon has recently crossed the $1 trillion threshold only to drop 3%. Facebook, too, has lost 3% of its value in one week. Netflix, Apple and Alphabet (the company behind Google) has each lost from 3% to 5% of the market capitalization over the course of the last 7 days.
FAANG stocks are not the only one to be affected, as other technological companies seem to follow their suit. Twitter, for example, has plunged 10%. The fall is attributed to the most recent testimony in front of the US Senate.
An ongoing trade war between the United States and China is cited as one of the reasons for a sudden drop. Apple, for example, relies on the Chinese market a lot. Extra tariffs, therefore, can negatively affect the profitability of their business.
The other reason is something you would not expect for a developed market democracy the United States is, which is political intervention. Though not direct, the involvement of Facebook and Twitter in the presidential election of 2016 may hurt their public relations and overall profitability for months if not years.
“Concerns have increased recently that technology companies may be hurting competition and inhibiting a free exchange of ideas on their platforms, which could result in government regulation,” said William Lynch, director of investments for Hinsdale Associates.
Some experts believe the tech stocks have been overbought for quite some time and, therefore, should retrace back once a good enough trigger appears. The combination of political and economic hurdles can be the push the tech market needs to fall. Even after the recent retracement, Apple is still up 30%, Amazon 65% and Netflix 80% this year. Not all experts believe the hi-tech sector is about to plunge. Aash Shah, senior portfolio manager at Summit Global Investments, is one of them. He also noted that the growth, indeed, may slow down in the weeks to come but will not reverse completely. At the same time, he advises to be more selective in stocks you invest in. According to Shah, Amazon and Netflix are incredibly overpriced. Conservative investors may consider investing in well-established companies like Apple, Microsoft, Alphabet and Cisco.
According to Andrew Left, the head of investing firm Citron Research, social media companies are not the ones you currently want to invest in. Left believes Snapchat and Twitter will sooner or later suffer a major drop and he may very well be right.
All in all, a lot of people believe that the hi-tech sector is overheated, and it is only a matter of time when the stock prices of the world’s most popular tech giants will start to go south (or at least stop growing). It cannot be said for sure when the moment of truth is coming. However, investors should be on the watch and prepared for a sudden plunge.
