If the US stock market is like a giant stone wall whose structural integrity depends entirely on the sturdiness of five tech megacaps, it didn’t act like it on Tuesday.
While one charter member of the Fang bloc struggled, the rest did what they normally do lately: go up. Facebook and Netflix each rose at least 1.6%, while Amazon.com and Alphabet also ended the day with gains. In fact, an index comprising Amazon, Alphabet, Facebook and Netflix just posted its best session in three days. It’s as if Apple’s sales warning never happened.
The group of high-growth, high-multiple tech gaints remains something of a defensive play in a stock market that’s struggling to assess the long-term impact of the coronavirus outbreak. Investors are lured to multinational titans with ample liquidity, strong balance sheets and more generally an outsize influence on the broader market. That’s enough to offset investor concern about the impact of slowing growth in China on the firms’ balance sheets.
“Oddly, technology megacaps have become safe-haven plays,” said Quincy Krosby, chief market strategist for Prudential Financial. “They are seen as companies that can absorb external shocks, and investors like their strong growth prospects and solid balance sheets.”
Apple sank 1.8% on Tuesday after warning that it doesn’t expect to meet its revenue guidance for the March quarter because of work slowdowns and lower smartphone demand following the coronavirus outbreak. The news pushed suppliers from Taiwan Semiconductor Manufacturing Co in Asia to Dialog Semiconductor in Europe into the red.
Companies like Facebook and Alphabet don’t rely as much on China for their profits. About 20% of Apple’s revenue in 2018 came from China. The broader Asia-Pacific region made up 17% of Facebook’s and 16% of Alphabet’s revenue during the same time.
Cash rich
Most of the tech megacaps have plenty of cash, adding to their defensive bearing. Apple is sitting on US$207-billion, and Alphabet has about $120-billion. Valuations of tech megacaps remain a potential concern, but less so when looked at the rate of the firms’ earnings growth. Earnings yields for the top market-cap stocks in the S&P 500 are nearly double their 1990s counterparts, data compiled by Bloomberg Intelligence shows.
The combined Facebook, Amazon, Netflix and Alphabet block has beaten the S&P 500 for 10 consecutive weeks, the longest winning streak since data going back to 2012 when the Fang Index was created.
They have “in essence become the safety stocks”, said Jeff Phlegar, CEO at MacKay Shields LLC. “Certainly the price action when we’ve had things like the unfortunate coronavirus come about — the flight to quality” has largely been through those names. — Reported by Elena Popina, with assistance from Morwenna Coniam, (c) 2020 Bloomberg LP
