- Investors have bid up the largest technology stocks to valuations that are unsustainable and set to roll over, according to David Bahnsen, the founder and chief investment officer of The Bahnsen Group.
- In an interview with Business Insider, he shared his concerns about big tech besides stretched valuations, and explained how a reckoning for the sector would affect the broader market.
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If you asked David Bahnsen for his view on when big tech stocks will peak, his lack of specifics will probably leave you dissatisfied.
The founder and chief investment officer of The Bahnsen Group knows well that timing the market is a fool’s errand. But he has detailed thoughts on why mega-cap tech’s ascent cannot continue forever, and on the obstacles lining up to disrupt it.
As the S&P 500 flirts with a record high and a new bull market ensues, Facebook, Amazon, Netflix, Microsoft, Apple, and Alphabet are maintaining their position at the forefront of gains. Their massive market caps mean they now constitute a record 20% of the S&P 500.
These companies are so formidable that you would be hard-pressed to find professional investors who are betting against them. The share of FANG stocks that hedge funds have pessimistically sold short relative to the overall float is at a record-low 1%, according to data compiled by Bank of America.
Despite the prospects that investors see ahead for these companies, Bahnsen pins his outlook to one unavoidable factor: valuation. He says prices simply cannot keep rising in leaps and bounds above projected earnings forever. And if Amazon, for example, is expensive right now at 121 times its trailing twelve-month earnings, investors would be unwise to hope that the ratio eventually hits 200x.
“At some point reality has to settle in, and I see big tech having a repricing that will be quite significant,” Bahnsen told Business Insider during a recent interview.
The extent of the repricing would depend on what happens to the rest of the market, he added. If it takes the form of a leadership shift, in which the broader market is stable but big tech is knocked off its perch, a drop of 20% to 25% could ensue.
However, if there’s a shift in market leadership and a drop in the whole market like we saw during the dot-com bust in 2000, then you could see a 40% drop, Bahnsen said. And while he cannot nail the exact timing of such a repricing, he acknowledges that the risk of a sudden slump is ever-present.
Specific risks to big tech
Bahnsen has multiple risks on his radar in addition to the law of mean reversion that repeatedly rears its head in the stock market.
He offers a caveat to his views by saying a major correction may not play out in similar fashion for all the mega-cap companies. For example, Facebook, with a price-to-earnings ratio of 32, is not as overvalued as Amazon at 121. Microsoft and Apple are much bigger generators of free cash flow than the other mega caps.
Still, he thinks they are all ahead of their skis.
Government regulation could be one external force that reins them in, he says. And despite the deep divides in Washington, there are bipartisan concerns around privacy and antitrust issues that could take the wind out of these giants’ sails.
On the latter issue of monopolies, Bahnsen says Netflix is uniquely vulnerable among its peers to the threat of competition. There’s no doubt it nabbed first-mover advantage and built a beloved household brand. However, Disney+, HBO, Apple TV+, and a growing number of streaming platforms could eventually become a problem for Netflix.
“The stock has been continually priced as if there will never be any competition,” Bahnsen said. “I am skeptical that that will continue forever.”
Speaking of things that may not last forever, Bahnsen challenged the notion that the post-pandemic world will continue to directly benefit these companies.
Non-mega caps like DocuSign and Peloton are among the clear-cut winners that are poised to continue benefiting from distanced ways of living, he said. But the rewards, if any, won’t be as eminent for the tech giants that are already richly valued.
“Apple hit lows in March that I very much doubt it would see again. But I think that some of the others could very well see a more significant drop,” he concluded.