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FAANGs vs. the ‘Nifty Fifty’ – is the golden era coming to an end?

We take a closer look at how the recent fall of the FAANGs compare to the ‘Nifty Fifty’ stocks of the 70s and what could be next.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The so-called FAANGs – Facebook parent Meta, Apple, Amazon, Netflix, Google parent Alphabet –are known as the crème de la crème of the tech world. But, like we saw with the ‘Nifty Fifty’, could their golden era be coming to an end?

The recent falls from grace for some of the FAANGs has some comparisons to the Nifty Fifty – where good companies got pushed to crazy valuations, but large gains were eventually wiped out.

We explore the two to see how they compare and look at some key lessons for investors.

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

What happened to the ‘Nifty Fifty’?

In the 1950s, the Nifty Fifty were all the rage – a group of 50 stocks that were said should be bought and never sold.

The companies all had similar characteristics – they were high quality franchises with strong balance sheets, benefiting from a growing economy.

But what had once been an investment trend based on fundamentals, turned into an abounding euphoria. At the peak of the bull market in 1972, the average price to earnings (PE) ratio of the Nifty Fifty reached 41.9. Compared to the US stock markets’ PE ratio of 18.9, it had climbed to unimaginable heights. During the bear market that followed later on in the decade, large price gains were wiped out.

Although this isn’t unusual during a downturn, the Nifty Fifty is a prime example of how speculation, founded on overstated optimism, can drive prices above their value. It’s important to remember ‘price is what you pay, value is what you get’ – the quality of the company is the same, the only thing that’s changed is the amount you need to pay for it.

What about the FAANGs?

The FAANGs are a group of stocks that need little introduction.

The famous acronym has become popular with investors since it was created in 2013. With that in mind, their valuations have grown to some of the most expensive in the market, boasting a combined market cap of $7.3tn at the end of 2021.

Similar to the Nifty Fifty, the FAANGs traded on an average PE of 40 towards the end of last year. In other words, investors were willing to pay £40 for every £1 of profit.

But so far in 2022, it’s been a different story for the famous five.

Rising interest rates have been the biggest bugbear for tech stocks. However, markets have also reacted to the Russia/Ukraine conflict, soaring inflation, and cost-conscious consumers tightening the purse strings. All of which have been bad news for the FAANGs as much of their attraction lies in future profits.

Large gains were wiped out in the same fashion to the Nifty Fifty, particularly in the case of Meta and Netflix.

Forward PE

Meta Amazon Apple Netflix Alphabet Average PE
Nov-21 24.0 70.0 26.4 53.4 26.5 40.0
May-22 15.0 67.3 21.9 15.6 18.6 27.7

Source: Lipper IM, correct as of 31/05/2022.

Lofty valuations come with weighty expectations too. The latest round of tech earnings delivered a mixed bag of results for the FAANGs. With that have come questions on whether there’s still value in the collection of tech stocks.

US tech earnings takeaways – a new era for investors?

What’s next for the FAANGs?

Although the recent selloffs across the tech sector share some similarities to the Nifty Fifty, we think the FAANGs will be around for a while yet.

They might no longer be stock market darlings, but the daily demands for FAANGs’ products and services are unrivalled. We’re now reliant on technology more than ever before and their influence on our daily lives shouldn’t be overlooked.

It’s just a question whether the shares have reached their peak, or if the best is yet to come?

Whether the FAANGs follow in the footsteps of the Nifty Fifty remains to be seen – only time will tell. However, there are some key takeaways for investors.

Key takeaways

  • Valuation – de-ratings and selloffs of highly-valued companies can be a painful watch for investors. It’s a reminder to own stocks because you think they’re good value for money, not because they’re popular. Share prices for ‘hot stocks’ can quickly become distorted in the short term, but tend to return to what they’re truly worth over the long term. This can lead to big losses if you’re too late to the party.
  • How to value shares

  • Diversify – it can be difficult to stay away from the excitement and success story that sit behind lots of growth stocks. But it’s important to not put all your eggs in one basket and see the bigger picture. Spreading your money across a range of investment types, sectors and geographies should increase your odds of having more winners than losers.
  • More on diversification and its benefits

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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