The technology sector, which has led markets in recent years, has not been immune from the recent market drop, falling almost 10% in October. We have written about the outperformance of the FANG stocks (Facebook, Amazon, Netflix Google), stocks that have appealed to investors for being able to grow rapidly in a slowly growing economy. Investors have been, up until very recently, willing to pay ever higher premiums for shares of these companies.
That dynamic has at least paused, as investors are questioning if the companies can continue to grow at such a rapid pace. Amazon dropped 8% last Friday as third quarter revenue was below analysts’ expectations and the company predicted that fourth quarter results would not meet analysts’ projections. Additionally, the growth of Amazon’s international sales has slowed. All told, the stock has dropped about 21% from its September high.
While no one doubts the power of the FANG stocks’ business models, assigning the right price to a business is never an easy endeavor. When, in Amazon’s case, the stock is priced very aggressively, at 132 times last year’s earnings, any misfires or missed expectations can lead to a rapid repricing by the market.