Are Tech Stocks Worth Biting into or Ready to Bite the Dust?

“FANG” stocks are all the rage – and no I am not referring to snakes or vampires!  FANG is the term coined by CNBC analyst Jim Kramer to describe large technology stocks Facebook, Amazon, Netflix, and Google.  And if you read the headlines lately, it’s easy to think these stocks could rule the world.  Facebook recently hit all-time highs on rising advertising revenue. Amazon announced it will move into the grocery business by purchasing WholeFoods, and its founder Jeff Bezos briefly surpassed Bill Gates as the world’s richest person. And Netflix and Google just seem to keep rising higher. These four stocks have all gained over 20% so far in 2017 (through July 30) and have led the overall technology sector (S&P 500 Information Technology Sector Index) to rise 22.3% far surpassing the S&P 500 Index which has risen 11.6%.

Haven’t we heard this story before? 

Today’s headlines might remind some investors of the 1990s when technology stocks like AOL and Yahoo propelled the market to new highs driven by the Internet revolution. Technology companies dominated the headlines then, and many investors tuned in for the first time to a then-fledgling CNBC to follow along. Of course we know that story did not end pleasantly when the so-called Dotcom bubble burst in March of 2000. So now are we doomed to repeat history?

Of course we can’t predict for certain what will happen. However, there are a few signs that indicate technology stocks are not necessarily headed for a crash as they were in the late 1990s.

First, the bull market we have enjoyed since 2009 has been very broad and not concentrated in just the technology sector. The chart below shows that during the four years leading up to the Dotcom crash, the technology sector soared 571% – over three times more than any other sector.

Compare that to the last four years of the current bull market, and you see a very different picture. Sure technology stocks have done well, but returns have not been nearly as concentrated. Instead, returns have been driven more broadly throughout the economy.

Also, valuations do not appear to be unreasonable. As of June 30, the price/earnings ratio for stocks in the technology sector was 17.9 – actually a bit lower than the 20-year average of 20.8. By comparison, in March 2000, with so many technology companies not even making earnings, the same ratio ballooned to over 50.

Finally, it was only a couple of weeks ago (July 19) that stocks in the technology sector have finally fully recovered from the losses of the Dotcom crash. The recent great performance has only brought the sector back to where it was over 17 years ago.

Conclusion

It’s important to not get carried away and chase the strong performance of the “FANG” and technology stocks that are making headlines.  At the same time, wary investors who remember the ups and downs of the late 1990s and early 2000s shouldn’t overreact either.

Sources:  First Trust, JP Morgan, S&P Dow Jones Indices

Data from S&P Dow Jones Indices