Five charts that spell trouble for tech shares

It’s been a tough few weeks for technology sector stocks. Following the fallout of the Cambridge Analytica scandal, Facebook shares have, since mid-March, fallen by nearly 14 per cent – a loss of $80 billion in market value.  

Facebook’s woes fed into other large tech stocks, with the overall NYSE FANG index, between 12 March and 23 March, falling by 9.8 per cent. Between the same dates, iShares US Technology ETF also dropped by 9.4 per cent. 

Since then technology shares have started to recover. However, as the following five graphs show, trouble may still lay ahead for the sector.

Chart one

It’s no secret that tech shares, before their recent troubles, had become an investors favourite. Buying FANG equities seemed a sure-fire way of beating the market. This year has seen record fund flows. As more experienced investors can testify, when a sector or part of the market becomes extremely fashionable things can quickly change.  

Chart two

At the same time, according to Bank of America Merrill Lynch’s Fund Manager survey released earlier in March, the most crowded trade for the second month in a row are FAANG stocks, as well as Chinese BAT (Baidu, Alibaba and Tencent), tech companies. 

Chart three

Adding to fears overheating in the sector, the ratio of tech versus utilities holdings shows a pattern as seen during the build-up of the dot com bubble. As the chart shows, there is a trend of investors abandoning conservative utility plays. 

 

Chart four

Some relief, however. According to Credit Suisse, forward price to earning ratios for technology stocks are not particularly overvalued compared to the rest of the market. 

As the chart below shows, valuations for tech shares – as a whole – are not hugely higher valued than the general index. Moreover, tech shares do not look expensive when compared to valuation differences during the dot com bubble at the turn of the millennium. Although, alternatively, it could be argued that non-tech equities in the late 1990s and 2000s remained more subdued while this time valuations have become too stretched across the whole index.

Chart five

However, the tech sector includes a wide array of companies – not just the big names. When you look at the leading and most well-known (and therefore favourites for retail investors) stocks, relative valuations are soaring. 

As the chart from Nomura Bank below shows, valuations in internet service providers and retailers, including investor favourites such as Amazon, Google, Netflix and (at least until a few weeks ago) Facebook, are reaching extremes. 

While S&P All-Tech valuations have been trending upward, these FANG-type stocks have flown, reaching similarly territory the All-Tech index during the dotcom bubble. 

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