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Big Tech Stocks Have Become Pricey, But Does It Matter?

Investing in mega technology stocks continues to be a winning bet, as the COVID-19 pandemic rages on. Stocks on the so-called “FANG+” index, which includes behemoths such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), are faring much better this year than the broader S&P 500 benchmark.

The NYSE FANG+TM Index (NYFANG) has surged more than 71% since the March dip, while over the same period, the SPX has gained about 24%. For the past 12 months, these tech stocks have delivered 80% returns.

Going forward, the big question is how long this powerful move could continue and whether the coming earnings season will be able to provide enough evidence to support this optimism.

Daily NYFANG+TM Index

Daily NYFANG+TM Index

Hopes for a quick economic recovery following coronavirus-related lockdowns and historic stimulus measures by the world’s central banks have lifted stocks. Yet some investors cite plenty of reasons to remain cautious.

These include projections for a bumpy economic recovery, setbacks to developing a coronavirus vaccine and uncertainty surrounding November’s US presidential and congressional elections.

When it comes to Big Tech, skeptics point out that these market darlings have risen too far, too fast. Some technical analysts indicate there’s a pullback coming soon in the sector. The Nasdaq 100 is now 19% above its 150-day moving average, an extreme level that’s usually followed by a correction.

Despite these warnings, most investors continue to favor large-cap tech stocks over any other trade, in the current period of uncertainty. Coincidentally, the products and services these tech giants offer, from cloud computing, to social networking and online shopping, have become more appealing since the global health crisis erupted. That advantage is unlikely to diminish anytime soon.

These companies are benefiting from shifts in business and consumer preferences in a post-coronavirus world. Major changes include local advertising moving online, increased e-commerce for groceries and luxury items, a higher percentage of workers telecommuting and the decline of business travel.

Wedbush Securities, which raised its price target on Microsoft (NASDAQ:MSFT) to $260 from $220, said in a recent note that the work-from-home environment should continue to drive the company’s cloud business.

“In many cases we are seeing enterprises accelerate their digital transformation and cloud strategy with Microsoft by 6 to 12 months as the prospects of a heavy remote workforce for the foreseeable future now looks in the cards with this COVID-19 backdrop,” the note said.

Fund managers’ preference for these mega tech stocks has become so prevalent that Apple (NASDAQ:AAPL) now makes up 43% of billionaire Warren Buffett’s equity portfolio. His investment firm Berkshire Hathaway (NYSE:BRKa) holds 250 million shares in the company. Since March, his AAPL stake has increased by $37 billion in value, just when the world’s most successful value investor lost billions on his airline bets.

Daily APPL Shares

Daily APPL Shares

Another argument in favour of remaining bullish on Big Tech is that trends like artificial intelligence, 5G wireless technology and big-data analysis will continue to support these stocks for years to come, even when the pandemic has been contained.

Fueling these gains too, are small retail investors who have become active traders during the pandemic. Many stocks that are popular among ordinary investors are also often held by multi-billion dollar hedge funds, including Amazon, Microsoft and Facebook (NASDAQ:FB), according to recent analysis by Goldman Sachs.

Bottom Line

Technology companies are providing investors with safety when other cyclical sectors are struggling to survive. With their stable earnings and potential for future growth, it’s hard to see that mega tech stocks will lose their charm anytime soon.

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