FAANGs have lost their bite

The fortunes of tech giants came crashing down in a shock market correction

DURING the past fortnight the stellar performances of global tech giants have come crashing back to reality, reminding investors that no matter the hype, a company is still judged on basic investment fundamentals.

Colloquially known as “The FAANGs” (Facebook, Amazon, Apple, Netflix and Google), they have been the darlings of the sharemarket and collectively tripled in value over the past four years.

They have all ridden the digital and mobilisation revolution which has disrupted the way business and consumers behave around the world.

Google with search and maps, Facebook in social media, Netflix in entertainment, Amazon with shopping and Apple with mobile devices have all changed our lives.

That impact has driven an insatiable appetite for investors to have a financial stake in the revolution and the companies driving it. And they’ve been rewarded by enormous share price rises.

But there now seems to be a re-rating of those sharemarket superstars based on traditional investment fundamentals. Facebook last week suffered the biggest one day drop in sharemarket value in American corporate history … $125 billion is a day. Wow.

The core of those questions is based around whether the huge revenue growth of the past can be maintained to justify high share prices. The questions relate to:

2.2 billion daily users

WITH

(and a global population of 7.6 billion), can Facebook grow much more?

missed its forecast growth in subscribers by one million.

a trade war stymie growth?

NETFLIX WILL REGULATORS

are now starting to bring tech companies into line with traditional competitors.

Apple went against the trend of the rest of the FAANGs with a better than expected earnings result last week and was rewarded with a strong share price rise.

We’re old enough to remember the dotcom crash of the late ’90s and there are a lot of similarities. Share prices getting ahead of earnings growth and regulators shining a spotlight with potential to stymie growth with restrictions.

The lessons for investors out of the past two weeks is to constantly monitor stock investments based around traditional (some say oldfashioned) fundamental benchmarks. And you must be aware of the constantly changing environment.

Astute investors watch for warning signs that indicate trouble ahead. And if you know what to look for, it’s possible to get out of risky plays before the real damage is done.

Here are five signs that a share price may be about to drop:

TROUBLE AT THE TOP

Senior executives leaving unexpectedly, selling large quantities of shares (as happened at Kogan.com) or teams turning over too regularly sends a powerful message that things may not be as rosy as the company’s public relations spin would have you believe. If the people with the most to lose are jumping ship, maybe you should too.

TOO MUCH DEBT

If a company can’t meet its debt obligations, it’s in big trouble … simple as that.

The standard measure of a company’s debt level is its debt-to-equity ratio, which compares total debt to shareholder equity. A ratio of less than one means the company’s equity is worth more than its debt. There’s no line in the sand for what constitutes “too much debt’’ because it can change from industry to industry, so it’s best to compare the debt-to-equity ratios for similar companies to see where your investment sits.

THE MARKET’S BLOWING BUBBLES

Markets aren’t always logical; sentiment, speculation and a herd mentality can all play a big part in influencing prices and pushing them higher than they should be.

A simple gauge of whether a share is overvalued is the price to earnings (PE) ratio, calculated by dividing a company’s share price by its earnings-per-share (EPS).

It’s essentially how much investors will pay for every dollar of its current profits, and is most effective when used to compare similar companies to see where the market has valued them.

High relative PE ratios generally indicate investors expect decent growth, but very high PEs compared to its industry, or the overall market, can be a warning that prices have peaked.

THE VULTURES ARE CIRCLING

Short sellers look to profit from falling share prices by borrowing shares in a company and selling them at the current market price.

If the price falls, they make a profit buying the shares back at the lower price and returning them to the original owner.

High levels of short selling for a share generally indicates that part of the market believes the company is overvalued and the price will fall.

These beliefs can become self-fulfilling, as other investors get wind and either sell or jump on the short sell bandwagon, pushing the share price further down.

CASH FLOW PROBLEMS

The trouble with net income (profit or earnings) is that it’s an accounting figure.

It’s not that hard for the finance boffins to push it one way or another to suit management interests.

Luckily for savvy investors, all listed companies are required to lodge a statement of cash flows that outlines the flow of cash in and out of the business, which is much harder to mask with financial trickery.

But if you’ve done the sums and believe a company has great long-term potential, back your investment decision and don’t be swayed by emotion or irrational market behaviour.