The brutal rout in tech stocks this year is shaking analysts’ confidence in once high-flying meg caps.
Brokerage firms expect shares of the so-called FAANG companies in aggregate to trade for less in the next 12 months than they had projected at the start of the year. The share-price targets for Facebook owner Meta Platforms Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. have fallen by more than 17% on average in 2022, putting that measure on track to decline over the year for the first time on record.
Broken Record
Average FAANG price target on track to decline for first time ever The turnabout in sentiment reflects the bear market that has hit the Nasdaq 100 Index this year, triggered by Federal Reserve interest rate increases, the impact of surging inflation on consumer demand, and supply-chain snags, all of which have fueled fears of an economic slowdown.
It’s analysts catching up to reality, and this is a massive change on how companies are being valued, said Greg Taylor, chief investment officer at Purpose Investments. “We’re now going to get the reality that with interest rates at these levels and inflation at these levels, these high-growth companies are not going to be valued the way they were.”
Even after a 22% drop for the Nasdaq 100 this year, some investors say tech stocks are still too pricey. Amazon sits at the top, trading at about 40 times estimated earnings, while Apple is at 25, Alphabet and Netflix are at 16 each and Meta at 14. The Nasdaq 100 Index is at 18 times projected profits.
“While some technology stocks are facing earnings challenges, the key issue in this current market rout is not so much earnings, but valuations,” said David Hansen, chief investment officer at The Hansen Group, a $3.6 billion wealth management firm. “It is starting to feel very much like this is the moment when the market has had enough with stocks that were trading at excessive valuations.” While analysts are dialing back their optimism, they haven’t completely capitulated -- their forecasts still imply an average climb of 48% in the next year for the FAANG stocks. The Nasdaq 100 is projected to climb 33% over the same period, and the S&P 500 is seen rising 25%. Apple is the only one of the five for which analysts have raised their average price target this year.
“There are names like Facebook that are trading well under a market multiple and which have potential for growth,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading. “If you have 100% cash, it is probably time to put some of that to work.” slowdown, triggered by Russia’s invasion of Ukraine and fallout from the Covid-19 pandemic
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