This article first appeared in Capital, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

CRITICS believe it was a bubble waiting to burst. After years of wildly inflated stock valuations fuelled by investors’ fear of missing the next big thing, technology stocks led a rout in the global stock markets in 2022.

The past 12 months probably saw the biggest fall for tech companies since the dotcom bubble burst in 1999/2000.

FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — also known as MAANG (Facebook was renamed Meta), which dominated the stock market for a decade, have been battered down by 25% to 66% year to date (YTD).

To some, a more inclusive grouping — referred to as GAFAM or GAMAM — defines Google, Amazon, Meta, Apple and Microsoft as the Big Five tech giants.

According to investors, “The Great Tech Rout” in 2022 was the inevitable result of a combination of macroeconomic forces — high interest rates and the end of ample liquidity, as well as fears over a possible recession.

Collectively, Silicon Valley’s biggest beasts had US$4.834 trillion wiped off their valuations since the beginning of the year (see table). Their price-earnings multiples have also halved.

Chinese tech stocks were not spared. Amid a regulatory crackdown and slowing economic growth, Chinese tech heavyweights like Baidu, Alibaba, Tencent and Xiaomi — collectively referred to as BATX — saw their share prices nosedive by 25% to 44% YTD, with close to US$300 billion wiped off their market capitalisation.

At current valuations, investors are now wondering whether the worst is over and they could start looking at tech stocks again.

Fortress Capital Asset Management (M) Sdn Bhd investment adviser and director Geoffrey Ng Ching Fung says the devaluation witnessed by the FAANG stocks was precipitated by money becoming expensive, driven by the fastest pace of the US Federal Reserve rate hikes not seen since 1988/89.

“We don’t think the FAANG era is over, but more that as these companies [that comprise the FAANG group] and their respective business models evolve over time, some will maintain their relevance and success over others,” he tells The Edge.

Ng observes that the pullback in market liquidity resulted in investors taking profits on positions that were most profitable, and which largely comprised FAANG stocks that had a stellar price performance in prior periods, especially during the Covid-19 pandemic period.

“Tech company valuations have become more realistic now, which allows investors the opportunity to reset expectations for the FAANG companies and evaluate their performance for the near future. We should not forget that these companies are still industry leaders with giant balance sheets, networks and resources to continue innovating and creating competitive advantages,” he says.

Other than the rate hike factor and its impact on tech stocks’ valuations, CGS-CIMB Securities Sdn Bhd investment adviser Billy Toh Kian Hin believes the sharp correction in FAANG stocks has also to do with the issues surrounding these companies individually.

For instance, he says, Facebook and Google’s parent companies, Meta and Alphabet respectively, are both struggling due to the intense competition on the social media front, with TikTok’s surging popularity becoming a worrisome threat.

“Meta has responded by investing into the Metaverse, a new business that will take a while before we can see any meaningful result, while Alphabet tries to innovate with its YouTube platform and tap the rapidly expanding cloud infrastructure market,” says Toh, who is also the investment coach at ProsperUs, a digital investment service launched by CGS-CIMB in Singapore.

Meanwhile, Netflix and Amazon are still going through the “Covid hangover” as the reopening of society put growth expectations in check. As for Apple, there is the concern of its exposure in China as well as the resilience of its iPhone sales.

Toh says the market collapse is a reality check for investors who have been accustomed to the growth-at-all-costs mentality. Nevertheless, he does not think the tech crash of 2022 is similar to the 2000 dotcom bubble crash.

“The dotcom hype had to do with a lot of new, exciting technology that few understood at the time. But today, the FAANG stocks are mostly profitable and in a good cash position. Unlike what we saw during the dotcom era, the FAANG stocks are unlikely to be completely wiped out, although their share prices could still see downside pressure in 2023 amid the quantitative tightening in the US,” he adds.

Regional marketing technology company Antsomi co-founder and CEO Serm Teck Choon concurs, noting that the Big Tech era — whether it is being called GAFAM or GAMAM — is far from over. Like Toh, he also insists that this is not a dotcom bubble 2.0.

“Tech stocks had outperformed others because of the lockdowns across the globe benefiting online and digital-oriented businesses during the pandemic period. But it is important to note that the fears over a possible recession that may happen in 2023 do not only affect the Big Tech stocks, but also other companies as well,” he tells The Edge.

Serm cites The Walt Disney Co, which had seen its share price drop 45% YTD, although the mass media and entertainment conglomerate lives in the old (traditional media and theme parks) and new (streaming media) worlds.

“This really shows the overall market sentiment, rather than just the fall of Big Tech stocks,” says Serm, who is a former president of the Malaysian Digital Association (MDA).

He adds that as borders reopened in 2022, people were moving back to the physical world, hence, spending was slowly getting back to the normal distribution between the offline and online worlds.

Old-school investors had long warned that if companies burn cash too fast, they risk running out of money and going out of business. But tech stock investors today insist that if companies do not burn enough cash, they might not be investing in their future and may fall behind the competition.

From a business perspective, what lessons can we learn from the business models of the FAANG stocks, and for that matter, other foreign software, internet, e-commerce and e-hailing companies?

Have the investors finally realised the importance of having a sustainable business model? Or will they continue to bet on the next high-flying Big Tech stocks in the future?

Fortress Capital’s Ng points out that the majority of FAANG stocks are highly profitable companies that produce healthy cash flow as compared with some of the newer internet, e-commerce and e-hailing companies.

“In a period when money is now more expensive and [capital is becoming] scarcer, investor attention has moved to more traditional investing metrics of quality of revenue and profitability. Therefore, there is little room now for companies that exhibit unsustainable cash burn in their operations for the pursuit of market share or dominance,” he says.

Ng also notes that these companies need to demonstrate that their business models can be sustainable and, more importantly, drive profitability going forward.

“In fact, many of the tech names have announced massive cost-cutting and business rationalisation measures in their attempt to demonstrate sustainability of their respective business models,” he says.

Despite a sharp decline in their share prices, CGS-CIMB’s Toh says most FAANG stocks are by no means cheap. With the exception of Amazon, the rest of them are trading in the range of three-to-six times their expected sales in the next 12 months.

“I think one of the key lessons that we can learn from the crash of 2022 is that every business has its value. Instead of continuing with the ‘growth-at-all-costs’ or ‘it is either go big or go home’ mantra, investors need to look at ‘growth with profits’,” he says.

Toh reiterates that for the past two decades, tech companies had been taking advantage of the low interest rate environment and deep pockets of venture capital firms.

“This has led to the listing of loss-making companies that are seemingly growing at a rapid pace such as Grab, Gojek, Meituan, Didi and others. However, this is unlikely to continue as the liquidity shock will put investors’ risk appetite in check,” he predicts.

Antsomi’s Serm echoes the sentiment, noting that businesses must strike a balance between exponential growth and a sustainable business model.

“We have seen tons of discounts and rebates available and pushed to consumers in the various super apps and marketplaces. While this is a ‘plus point’ for consumers to push them to spend more on a specific platform, it’s not sustainable from a business standpoint,” he warns.

Interestingly, says Serm, this phenomenon is also reflected in stocks like Apple and Microsoft from the opposite perspective.

“Apple and Microsoft’s share price drops are far less than others because they are diversified with strong fundamentals. Moreover, their businesses are not built on top of discounts and rebates,” he states.

So, what’s next after FAANG stocks? Certain quarters believe the new FAANG could be the so-called MATANA stocks, namely Microsoft, Apple, Tesla, Alphabet, Nvidia and Amazon.

Considering that the US and global markets have witnessed tech companies evolving into mainstream blue chips over the past two decades, Fortress Capital’s Ng is of the view that the Big Tech firms are here to stay.

He opines that the MATANA grouping includes both mature and mainstay companies such as Microsoft, Apple, Alphabet and Amazon that have demonstrated through time their ability to continue innovating and staying ahead of their competition with very dominant and compelling business models.

“As for the ‘not so old’ names like Tesla and Nvidia, they are trendsetters with products that are in really high demand currently, but also facing increasing competition from other industry stalwarts and potential risks or opportunities arising from changing consumer preferences,” he says.

Ng adds that the re-allocation of investment portfolios from overweight technology to a more balanced mix of old economy and new technology has already run its course over the years. “It will be interesting to see if investors will now start overweighting technology again in 2023, albeit with a much more judicious look at a technology company’s ability to generate value and profitability.”

CGS-CIMB’s Toh also believes that both the new and old Big Tech stocks will remain relevant, given that the structural growth story for tech companies remains intact as both consumers and businesses shift towards digitalisation.

“This will benefit those involved in the cloud infrastructure space while the deglobalisation phenomenon will continue to affect how both US and China tech stocks grow. One thing is certain, though. Investors will put a lot more emphasis on profitability now compared with what it was in the past,” he says.

Having said that, Toh concedes that the significance of tech stocks will not be as pronounced as what the market has seen over the last decade as investors look beyond growth.

“The adoption of new technology by well-run old-economy companies will help improve their productivity and services, allowing them to push for a steady growth over the next decade. However, the Big Tech stocks will find it difficult to sustain their high growth rates,” he says.

Antsomi’s Serm notes that the three main tech drivers in this decade are artificial intelligence (AI), data and fifth-generation (5G), while MATANA will play significant roles in supporting the US markets continually.

“Nvidia, which specialises in GPU (graphics processing unit), and Tesla, which revolutionised the automotive business, are definitely worth looking at. Fundamentally, Apple, Microsoft, Google and Amazon are still very strong in their respective businesses, and they will rebound once the macroeconomy and market sentiment improves,” he says.

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