Is now the time to be greedy and buy the FAANG stocks?

When it comes to growth stocks, Alphabet, Amazon, Apple, Meta and Netflix have been in a class of their own. So popular have they become over the past 10 years, that investors simply refer to them as the FAANG stocks.

However, 2022 has been a different kettle of fish. All five of these former stock market darlings are trading significantly below their all-time highs. The table below highlights the extent of this sell-off together with their forward price-to-earnings ratios.

I’m asking myself whether now is the time to be greedy while others are fearful, or is further pain ahead?

Disruptive organisations

If I was to summarise one common theme that makes these businesses so successful then it would be their mission statements. Each is unashamedly bold, transformative and aspirational in nature.

So, Alphabet’s mission statement is to organise the world’s information. Meta’s is to bring the world closer together. Apple, the oldest of the FAANGs, has refreshed its mission statement throughout its history. In its early days, for example, it was centred around bringing computing to the masses. Not an easy thing to achieve in an era of mainframe computing.

Tech Bubble 2.0

Back in January 2022, the top 10 companies in the US were trading at 37 times earnings. For me, too much optimism was baked into their continued share price performance. A similar optimism existed at the peak of the tech bubble a couple of decades ago.

In the run up to the millenium, we had the dreaded Y2K problem. This led to a massive surge in IT spending across the globe. Such spending mirrored the run-up in tech stocks at the time.

In a similar way, over the last couple of years, Covid forced companies to move their operations to the cloud in order to support remote working. Further, at an individual level, people stuck at home enjoyed either stimulus payments or had greater disposable cash from their salaries.

In both time frames, the earnings of tech companies soared. It was a classic late business-cycle burst. But if the underlying fundamentals don’t support a stock’s valuation, eventually gravity will take hold.

The genie is out of the bottle

There’s one major difference between the dotcom boom and today, and that’s inflation. Today, it stands at a 40-year high.

There remains a belief in some quarters that stocks do well in high-inflation environments. But history tells another story. In the 1970s, a decade mired in stagflation, the S&P 500 lost 50% of its value in two years and many stocks took over 15 years to recover. Another decade lost to inflation, the 1910s, was similarly bad for equities.

Inflationary environments are particularly brutal for growth stocks because rising cost of capital means it becomes increasingly difficult for them to justify their lofty valuations.

I would argue that the FAANG stocks have by and large avoided the bloodbath so far. But if the Fed is unable to rein in US inflation soon, things could get a lot worse. Therefore, I’m waiting on the side-lines for a more attractive entry point to what are undoubtedly great companies.