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How have the mighty fallen! There have been catastrophic drops in the shares of what were known in their heyday as the FAANG companies.
This is the group made up of Facebook – now Meta – Apple, Amazon, Netflix and Google, which later became Alphabet.
Shares in Meta — which owns Instagram and WhatsApp — are down 56 percent amid doubts over its goal of mastering the metaverse.
In the slow lane: Shares in Tesla, run by Elon Musk, have collapsed
Apple’s market cap has shrunk from $3 trillion to $2 trillion.
In the coming weeks, the results of some of these companies and other technology names will reveal the damage done by higher interest rates and turmoil in China. Some Wall Street traders are warm to the sector, believing the gloom is now exaggerated.
Investors should still exercise caution, even as tech funds have posted record returns of 463 percent over the past decade. This calculation, by broker AJ Bell, takes into account the recent sell-off.
Our reliance on technology in every area of our lives is growing, but companies in the sector face significant challenges.
Some of these problems are the result of reckless spending in the age of easy money, especially on staff. Did Big Tech companies assume that the increase in demand for their services during the lockdown would be permanent and that they would be (extremely) lightly taxed and regulated? Seems a little lame if they did, but maybe.
Now the disruptors are disrupted by intruders such as the video app Tik Tok, part of the Chinese ByteDance, and by ChatGPT. This artificial intelligence software, which can answer and write questions almost like a human, could rival Google search. Microsoft has invested $10 billion in the creator of ChatGPT, OpenAI. The Silicon Valley giants are laying off staff. In addition, there will be stricter regulations and therefore heavier taxes.
A reassessment of what constitutes a tech company is underway, with an emphasis on stocks like Tesla, which appears to have been disrupted by boss Elon Musk’s takeover of Twitter.
Dan Brocklebank, investment director of fund managers orbis, argues that Tesla should be viewed more as a car manufacturer and asks why it is worth five times as much as General Motors. These are relevant issues, and not just for those who directly hold Big Tech stocks.
Tom Slater, manager of Scottish Mortgage, the FTSE100 technology fund that owns Tesla, has apologized to shareholders (of which I am one) for misjudgments about China and the sustainability of Covid-induced changes.
Yet many other investors are exposed to Big Tech through global equity funds. Bestinvest’s Jason Hollands says: “Global funds can be very US-focused as US companies make up 68 percent of the MSCI world index. Even at this level, I wouldn’t see Big Tech stocks as a screaming bargain.”
David Coombs, of Rathbone, sees Meta as particularly risky because it “burns through capital.” But UBS rates Apple as a “buy” while acknowledging the slowdown in the app store. Barclays likes Amazon, arguing that Amazon Prime is “the e-commerce killer app.”
Thanks to shows like Emily In Paris, Netflix this week reported better-than-expected sales, profits and subscriber numbers. The new, cheaper ad-level plan seems to have more potential than originally thought. Jefferies the broker has already upgraded the shares from ‘buy’ to ‘hold’.
Despite ChatGPT, Bank of America has chosen Alphabet as one of the top picks for 2023. If you have confidence, you have an interest in both. This investment trust is one of broker Winterflood’s picks for 2023.
If you also look at the contents of your global and technology funds, be happy when you see Microsoft. The group’s dominance makes it one of Citi’s top buys. Microsoft is the largest holding at Fundsmith into which I put money every month, although I may not always agree with manager Terry Smith’s statements.
You should also check whether your funds align with the new, broader definition of a quality technology company. Alec Cutler, of Orbis Global Balanced and Cautious Funds, cites Signify, the LED lighting business, formerly Philips Lighting.
He also likes Siemens Energy and its next-generation hydrogen-generating turbine.
Investec downgraded Scottish Mortgage to “sell” but I’m sticking with confidence, I’m sticking with Scottish Mortgage partly because of the prospects for its privately held holdings like ByteDance and Musk’s Space X. It’s my bet on long-term flying taxis and other innovations, which was never going to be an easy ride.
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