Over the past few months, questions have been raised about the possibility of a FAANG stock bubble – because of these companies’ spectacular performance so far this year and their sky-high valuations.
Analysts are drawing parallels between now and the period before the dotcom bust in 2000, when many overvalued tech companies crashed, causing the global financial markets to slip into a downward spiral.
So is there a FAANG stock bubble? It depends on whom you ask…
The “Yes” Camp
Over the past two months, the Nasdaq has experienced volatility with sell-offs following the rallies that saw the index reaching record highs. Big gains earlier this year from FAANG shares are causing nervousness among investors, and some believe that these stocks are overvalued and are opting to sell. Additionally, there is concern that the market is too top heavy with the four largest stocks in the S&P 500 tech sector (Facebook, Apple, Amazon, and Microsoft) accounting for around 48% of market capitalisation. With so much attention focused on the tech sector – Bank of America strategists say the Nasdaq is the “most crowded” trade on the planet – and tech stock prices hovering at record levels, a wave of investors may move to reduce their exposure to tech in general and FAANG stocks in particular.
The “No” Camp
Since June this year, the Nasdaq has dipped 1.5%, implying a correction in the prices of the FAANG stocks. This dip has brought them closer to their valuation figures and has made them more affordable. Separately, some analysts believe that FAANG companies have significant growth potential as new technologies such as artificial intelligence, machine learning, and big data are still being explored and developed. Perhaps the most telling sign is that the number of investors betting against FAANG stocks dropping is decreasing. As of early August, short bets against FAANG stocks represented only 2% of their traded shares – half of the level seen by the S&P 500.