Across the global markets, the music is beginning to slow down for the technology stocks, for the spoils of the pandemic, enabled by a generous monetary stance, are now over. The double whammy of the Russia-Ukraine crisis and the Covid lockdowns in China have resulted in an inflation problem for households, and thus, the Central Banks are now steadily increasing the interest rates, resulting in a rude shock for many shareholders as the stocks undergo a reset in valuation.
The first calamity of the interest rate hike has been the FAANG (Facebook, Apple, Amazon, Netflix, and Google). The opening up of the economy and an interest rate shock have revealed the fundamental weaknesses of Netflix, often confused as a technology company. Netflix, against the Wall Street forecasts of adding 2.5 million subscribers in Q1 of 2022, registered a net loss of 200,000 subscribers, resulting in the stock being hammered. Almost touching $700 last year in October, the stock is now trading at less than $190. Netflix has not only wiped out all its pandemic gains, but also lost close to two-thirds of its market value in the last year alone.
This brings us to the FAAMG (replace Netflix with Microsoft). The year has so far has been unkind to these five companies with a collective market capitalisation of $7 trillion and making up for one-fifth of S&P500. Thus, the five companies are a critical indicator of how the markets are moving and what the investors are thinking. In 2022, Apple shares have fallen by over 20 per cent, Facebook (Meta) by over 40 per cent, both Microsoft and Google (Alphabet) by over 21 per cent, and Amazon by close to 35 per cent.
Even the giants are beginning to feel the heat. Tiger Global, one of the biggest investment firms in the world, known for its bullish stance on some risky tech stocks, have registered heavy losses. As per the filings earlier this week, the total value of their public stock positions have fallen by over 40 per cent, to $26 billion, at the end of Q1 of 2022. Tiger Global has completely exited Netflix, Bumble, Airbnb, and Didi.
Some tech stocks in India have also been hit with a reality check. For instance, Zomato, since the beginning of 2022, is down 60 per cent, and has lost over 50 per cent of its value in less than a year after its listing. The fundamentals of Zomato were always shrouded in opaqueness, given their difficult relationship with the eateries, as elaborated here.
Paytm, another stock shock story, is down by over 55 per cent since the beginning of the year, and since its listing has lost over 60 per cent of its value to trade at around Rs 600. For the same period, Nykaa is down over 30 per cent, and has lost close to 40 per cent of its stock value. While a bit of the fall can be attributed to the blood bath in the global markets, now, it is the question of fundamentals as well, and this is precisely why one should be optimistic about the FAAMG like stocks.
Since the dot-com bubble crash, in the early 2000s, apprehension against the tech stocks has prevailed, with sceptics fearing a crash. The pandemic, to the surprise of many, was good news for tech stocks, so much that even companies with weak fundamentals, like Netflix, were able to ride the wave for free money, but now, the technology stock markets are entering a brave new age.
This new age is characterised by companies diversifying their businesses. Apple wants to get into augmented reality and streaming. Microsoft is betting on the metaverse, and has recently made a $68 billion acquisition to become the third largest gaming company of the world, putting it in direct competition with Tencent and Sony. Alphabet, through Google, wants to expand its horizons in the search and advertising space, banking on the progress of artificial intelligence and machine learning.
Facebook has been rechristened into Meta, a company that wants to completely change the way we interact online, and if the teasers are any indicator, it is the ideal time to go long on Zuckerberg. Amazon wants to disrupt every business it can touch, be it pharmacy, credit, retail and FMCG, logistics, luxury goods, and who knows, if they play their cards right, even NFTs.
Simply put, the big companies, and many smaller companies alongside, will now embark on a path to rewrite the world wide web as we know it, through augmented and virtual reality or through the new digital world of metaverse. This is where the long game is.
A few will fail, as they always do, but the ones with the strong fundamentals, starting with cash flow, will survive. Recall that line from The Founder, ‘Mr Kroc, if you're not making money hand over fist, something's terribly wrong’. This is where the FAAMG stocks are destined to succeed, even after being thrashed all this year.
The technology is changing, so is the corresponding business, and so are the winners, but one thing remains the same- that stocks respond to profits on the ground and not values imagined in boardrooms. For reference, Tanla platforms, a company that enables B2C communication for banks, has gone up by 2,480 per cent in the last five years alone, and all because India’s economy is digitising. In late 2013, its share was trading at less than Rs 3, and in January, before the markets began sinking, it was trading in excess of Rs 1,800. Hail fundamentals!
Welcome to the new age of tech investing. Buy the dip but evaluate the fundamentals.
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