Investors were dumping FAANG stocks again Friday and there just may be some very plausible explanations as to why that’s happening after an apparent rebound from a correction over and done with.
FAANG stocks fell 13% in a span of several weeks in September. Valuations were in re-rate mode as at-home growth services like cloud computing, data center storage, e-commerce and streaming may have seen a massive demand pulled forward from later years in the maturity cycle of these businesses. Friday, FAANG stocks were down more than 2% by 2:15 PM EDT. Cyclical stocks, on a day which employment figures missed estimates and caused some investor anxiety in the morning about the speed of the economic recovery, mostly rose. And the 10-Year Treasury yield rose to as much as 0.70% from 0.67%. That indicates growing inflation expectations, which indicates a recovering economy and means investors do not have to take risk with high-multiple growth stocks, as some beaten value stocks like airlines and restaurants can move up with the economy.
Yet Friday’s sell-off was all about tech.
Here’s one potential explanation:
“People are looking to fund some of the other [trades],” by selling large cap tech stocks,” Marc Preffer, chief investment officer at CLS Investments told TheStreet. “The IPOs the last couple of weeks — it’s possible you’ve been seeing other technology stocks go down and they [investors] are just looking to make room for purchases. The first place people go for that [funding other stock purchases] — selling some of the old tech and into these new technology companies.”
The pressing question on FAANG stocks the last few years — all risk factors considered — has been whether their outperformance can continue, whether the premium near-term earnings growth relative to value sectors will be outweighed by their maturing disruptive industries, dimming long-term growth and compressing multiples. But their multiples have held up as these cash-rich companies use their scale and existing technology platforms to create new business lines.
And with the Nasdaq 100’s outperformance of value this year reaching a margin wider than what was seen before the internet bubble burst in 2000, the question of continued outperformance arises again. Investors, starved for growth stocks in an economic environment that likely will not yield more than 3% GDP growth for the next few years, are looking for alternatives to FAANGS.
Enter the IPO market.
According to data from Ally Invest, the IPO market is expected to hit $80 billion in 2020. The biggest IPO year since 1990 sported $60 billion. This adds some — not plenty — of supply of shares to the market for growth stocks.
Recently, demand for IPO’s has been apparent on an offering-specific basis. Unity Software (U) – Get Report, whose CEO recently spoke with TheStreet, saw its share price pop 35% just weeks before its listing. The valuation was $13 billion, and the company raised a few billion dollars. The company is benefiting from the growth of video games with 3D graphics, rather than lower quality graphics and video game developers are turning in to third party software developers like Unity to create the right software.
Snowflake (SNOW) – Get Report, another software company, raised more than $2 billion and Friday was trading at a market cap of $65 billion.
None of this means FAANG stocks are doomed or can’t outperform. It does mean growth tech spans beyond FAANG and investors are at least appreciating that reality.