Skip to main content

Sound Advice: April 27, 2022

The Ups and Downs of Technology Stocks

Over extended periods, some of the strongest returns have been turned in by technology stocks.  But along the way, there have been big upsurges and unnerving plunges.  Last year, the group of technology stocks known as the FAANGs were market darlings.  The group includes Meta Platforms (a.k.a., Facebook), Amazon, Apple, Netflix, and Alphabet (a.k.a., Google).

So far in 2022, they’ve hit the skids.  Here’s the comparison.  In calendar 2021, the FAANGs, led by Alphabet (+65%), climbed 27% on average.  Since January 1st, they’ve dropped 30%.

Other popular pandemic names had even worse fates.  Zoom Communications, often the virtual meeting application of choice, went down 46%, followed by a similar collapse this year.  DocuSign, another favorite, lost 32% in 2021 and then had a further loss of 44% for the year to date.

Although the recent rough going for the markets reflects investors’ fears stemming from the war in Ukraine and unusually high inflation, the inevitable slowdown in growth as companies get bigger certainly has had an important impact.  Amazon, for example, had been growing at 68% a year for the past five years.  Its projected growth rate for the next five years is about half that fast.

Netflix is an even more extreme example.  The annual growth rate for Netflix over the next five years is projected to shrink to 16% from more than 90% a year during the last five years.  The company just reported a loss of 200,000 subscribers and a further substantial reduction of the subscriber base is expected.

Even Apple, one of the Steady Eddies in the group, has been settling down to a more mature pace.  The view ahead is for annual gains of about 10% compared with 22% yearly for the last five years.  After a decade and a half of extraordinary advances, thanks primarily to the iPhone, Apple’s gains are now slowing.  The improvements in each year’s new models have been less dramatic than those of the past and consumers are waiting longer before upgrading.

For the strongest of these companies, the future remains bright, but there will be bumps from time to time and growth slows as they get bigger.

N. Russell Wayne, CFP®

 

Any questions?  Please contact me at nrwayne@soundasset.com

                                                                                                                            

 


Comments

Popular posts from this blog

Sound Advice: March 16, 2022

Pullback . . . and then what?   The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey. The story is as follows: Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’   And he said: ‘Yes, I do.’ They said: ‘Do you think you can tell us what the stock market will do?’   He said: ‘Yes, I can.’   They said: ‘That is very interesting.   Will you please do so?’   He said: ‘Yes. It will fluctuate.’ Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hop

Sound Advice: January 5, 2022

Where do we go from here?   When you consider the wide variety of factors that impact the economy and the investment markets, it would be unrealistic to be encouraged by prospects for the next few years.  Yet, although opportunities for continued progress may be more limited, there are always some worth considering. Let’s put this in perspective.  Following the 23 trading days of The Pandemic Plunge, which saw prices collapse by 34%, the Standard & Poor’s 500 Index then rebounded 113% by the most recent December 31st.  On that date, the forward price-earnings ratio of stocks in the index had risen to a lofty 21.2 compared with a 25-year average of 16.8.  (That ratio is calculated by dividing the latest level of the index (4,766) by the estimated earnings of the included companies for the next 12 months .)  By all measures, that’s a hefty valuation, one that’s even more so since it depends on estimates of what’s to come, which are anything but assured. Other measures confirm

Sound Advice: May 26, 2021

Growth vs. Value? One of the longest-running dichotomies in investing is the ongoing tug of war between growth stocks and value stocks.   Growth stocks are generally seen as companies that are growing consistently and, typically, at above average rates.   Value stocks, on the other hand, are companies whose progress is less consistent and often relatively slow.   At first glance, one wonders why investors would look beyond growth stocks to fill out their portfolios, but there’s more to the task of portfolio construction than just picking market stars such as Amazon, Apple, Facebook, and the like. Here’s the hitch.   Over time, most growth stocks will turn in better returns than most value stocks.   The key word here is most.   A portfolio of diversified growth stocks will usually be selling at significantly higher valuations (price-earnings ratios) than a portfolio of diversified value stocks.   Why?   Because more rapid and more consistent growth rates give investors greater con