The fallout from Facebook’s dramatic post-earnings plunge rippled across markets Thursday, undermining risk sentiment and threatening to upend a nascent rally that saw the FAAMG cohort add back $870 billion in value from the January lows.
A wave of price target cuts for Meta were accompanied by cautiously constructive commentary, even as analysts were forced to reckon with headwinds that one bank euphemistically described as “clearly larger than envisioned.”
A 20% drop in Facebook shares would equate to some $180 billion in lost market cap, among the worst one-day value destruction events for any company in history.
Read more: Meta May Torpedo US Stock Rally With $200 Billion Plunge
Not helping matters was Qualcomm. Shares were down more than 3.5% as pedantic investors nit-picked solid results. It’s possible that a near 20%, four-day, pre-earnings surge set the bar so high that Qualcomm couldn’t have cleared it no matter what they reported.
In any case, semis were under pressure, and Facebook was poised to drag down other social media names, as well as the entire Nasdaq.
“When a market has such narrowly concentrated leadership, the major indices live and die with the performance of those leaders,” JonesTrading’s Mike O’Rourke said. Meta and Spotify told “vastly different stories” than Google, and when you “add the likes of PayPal and Netflix it becomes clear that Growth stocks have a larger problem than rising interest rates,” he added, noting that “the primary challenge going forward is that it takes investors a long time to find a multiple for Growth stocks that have stopped growing.”
That gets back to the idea that some Growth stocks may not be Growth stocks after all. Or, perhaps more accurately, may not be Growth stocks anymore. FAAMG is expected to account for around 17% of S&P 500 EPS in 2022 according to Goldman. Over the past decade, “the stocks in aggregate have compounded their sales at a CAGR of 19%, fully 14pp faster than the rest of the S&P 500,” the bank’s David Kostin wrote late last year. FAAMG stocks usually report annual sales that are 6% greater than consensus expectations at the start of the prior year. The typical stock, by contrast, has reported annual sales that are 0.5% lower.
The figures (below) are a poignant reminder of just how reliant the US is on a handful of companies when it comes to preserving so-called “American exceptionalism” vis-à-vis equity markets.
Looking ahead, FAAMG may need to grow through acquisitions, something that could prove challenging, not only given their scale, but also the political environment. Big-tech regulation is one of the few issues that enjoys bipartisan support on Capitol Hill. I think it’s entirely fair (where “fair” means accurate) to say that Facebook is despised by at least some lawmakers on both sides of the aisle.
Last year, Goldman called “the need to maintain lofty expected sales growth rates” the FAAMG stocks’ “greatest risk.” Kostin wrote that,
During the two years following the March 2000 Tech Bubble zenith, the five largest companies at the time (MSFT, CSCO, GE, INTC, XOM) collectively posted one-half the sales growth that had been expected by consensus (8% vs. 16%) and missed consensus margins by 300bps (12% vs. 15%). The group’s relative valuation contraction was dramatic.
For the S&P, “concentration risk” has never been higher on many metrics.
Whatever the case, “anomalous” post-earnings declines are piling up for US Growth shares. That’s not the best news for an equity market with so much embedded duration risk in an environment of rising rates and tighter monetary policy.
“Since the 1990s equity duration has increased, especially post the COVID-19 crisis, which means smaller bond yield increases matter more,” Goldman’s Christian Mueller-Glissmann wrote last month.
“The increase in equity duration during the COVID-19 crisis has been most pronounced in the US,” he added, referencing the figure (above) and cautioning that “higher equity valuations in the US could also become headwinds for returns.”
Mark Zuckerberg was set to lose as much as $24 billion on paper Thursday.
If there was an ETF that mirrored SPY/VOO minus Tsla and FB, I would buy it.
Hyundai is going to eat Tsla’s lunch- either Tsla shifts to even more excellent batteries or they will be crushed. A tsunami of well built and strong performance e-cars is coming.
I have never been on Facebook- evidently, I am missing out on “so much”- but when something lacks substance, people generally can easily leave that behind and instead go for the next new, shiny toy.
Your take on Facebook is wise. However, FB could have been something of substance. They failed. They even admitted it when they announced Meta which they not only stole from another company, but they’re using it wrong. It doesn’t mean what they think it means.
When will the punters understand that no company can grow faster than the economy indefinitely? The majority of industries in the economy are in decline (industries = groups of companies providing products or services that are close competitors to one another). Our current “growth” companies will lose this status in the near to intermediate future and people should not be too shocked when it happens. Think about it, Zuk claims nearly 2 billion people are on FB every day. That’s more than a quarter of the world. An equal amount of the world’s pop can’t even get a glass of potable water. How many more can we reasonably expect to get on FB? Why would people who are barely surviving want to be stupid self-centered idiots posting pictures of the bugs they managed to scrape together for their dinner?
@Mr. Lucky, I think the idea is they put on VR goggles and suddenly their scrap of desert is St. Moritz and their bugs are foie gras.
Jyl- you have to watch the movie, “WALL-E”. So funny- in a disturbing sort of VR way.
I’m surprised we haven’t seen more generalized market contagion given FB approx 1.9% of SPY and 3.8% QQQ…perhaps more will be coming….
FB is now a case study on the impact of no growth to the valuation of a growth stock: about minus 25%. Yet, its share value is still at or just above its pre-pandemic high.