Stocks of major technology companies, such as Apple, Amazon, Microsoft, Google and Facebook, fell 5% in February according to the NYSE FANG+ index, while the broadest global stock index MSCI All Country World has been around zero since the beginning of the month.
Stocks of large technology companies have probably started to fall because yields to maturity of US government bonds (Treasuries) began to rise quite strongly in recent weeks. And it is precisely the stocks of large technology companies that are most sensitive to movements in bond yields to maturity, as in discounted cash flow (DCF) valuation models, unlike value companies in traditional industries, a significant part of their expected cash flow is realized in the distant future. Higher discount rates within the valuation models of discounted cash flow logically lead to a larger decrease in the estimate of the fundamental intrinsic value of stocks. We can also say that the duration of cash flow of large technology companies is much higher than for value companies from traditional industries.
I believe that the stocks of large technology companies within the NYSE FANG+ index should continue to decline in the coming period. After all, the performance of this stock index over the past 12 months has been truly phenomenal, with the NYSE FANG+ gaining 108%. Due to this performance, in my opinion, the equity valuations of this index have reached unsustainably high levels, with the P/E valuation ratio being 52 and EV/EBITDA 32. Although these are amazing companies with unique business models, very strong cash flow and in some cases with highly above-average growth, valuations have, in my view, reached such high levels that fundamental factors simply cannot justify.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.