Will there be a new collapse of the dot-com

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Digital air

Smart phones, computers and other gadgets have become available for several billion people on earth, and ultimately it is the consumer their money constantly paying companies for the chance daily to enjoy the benefits of digital technology. With a huge array of data that can be collected using digital devices — Big Data is now a valuable resource for business. Because it allows you to create new services to spur sales and influence consumer preferences.

Corporation FAANG was able for several years to establish itself on the main directions of digitalization is search engines and navigation, digital video, Internet Commerce, social networking and instant messaging applications, mobile applications for smartphones, the entertainment industry. In the U.S. 78% of GDP is created by services sector (including financial), and therefore it is considered that the success of a business is adherence to style FAANG.

And the “famous five” came to be regarded as a base for the creation of “Great conductor” system, which will be incorporated into the sector of trade and services, but also public administration, education, health, transport etc. Well how here not to buy more shares of these promising companies with a bright future?

Будет ли новый крах доткомов

New philosophy

On the classical stock market investors are usually interested in the ratio of the value of paper income on it, the so — called P/E ratio and a number of similar indicators, P/B, P/S, EV/EBIT. It was believed that shares of companies valued at fair value, if the P/E ratio is in the range of 12-14. Relatively speaking, this number corresponds to the number of years for which dividend payout will return to the investor initially invested in share money. But now these rates are already very few people care about. When the market boom, the only thing that matters in the eyes of investors is compound annual growth rate (Compound Annnual Growth Ratе, or CAGR), which is given the stock.

CAGR for shareholders consists of three components, the main profit from business growth, followed by positive market revaluation and finally dividend income. The average P/E ratio at FAANG reached 130 (Amazon and now 187), testified to incredibly inflated market value, while stocks continued to grow. Nobody was interested in neither the Amazon losses in previous quarters (about Tesla, needless to say), nor the fact that the dividend yield of the S&P 500 stock now of 1.98% and annual risk-free rate of US Treasury securities of 2.41%, or political scandal around the leak of personal data from Facebook.

Investors buy what’s growing, what’s popular, where are the capitals, and focus on popular assets attention of hedge funds. After all, the “fear index” VIX is near historic lows, the volatility is low, and the market for several years have not been big moves down.

Return to the real world

Trees do not grow to the skies. Company FAANG become too large to in subsequent years to maintain past growth rates. Remained relatively few people not covered by digital services.

Audience Facebook has started to decline, and the profitability of advertising on the social network decreased. The cost of Netflix does not correspond to the growth of subscribers on the video content. Apple every year more and more difficult to compete with companies from South-East Asia. Financial performance of Amazon unstable, its profit is held by “cloud” business and advertising. Business Google can be restricted not only in Asia (China search engine prohibited), but also in Europe.

And in the financial markets, dark clouds. The reversal of the credit cycle, reduce liquidity, increase the discount rate of the Federal reserve and the cost of money for companies, a total debt load of governments, corporations and the public, trade wars — all this does not Bode well as a business FAANG and the rest of the market as a whole.

The FAANG stock will decline by at least 35-45% of the current cost to be assessed and indicators of quarterly earnings (EPS) was started to meet the new realities. So still shining in the sky balloon FAANG soon deflate. However, it will not burst like a bubble though, because the digitalization of the world will continue, covering most fields of human activity.