S&P 500 Returns 30/12/16 - 30/06/17 vs FAAMG Stocks (rebased to 100) valued companies within this group. With Amazon trading at 188 times earnings and Netflix at 208, in comparison to the S&P 500 at 23, it is easy to see that valuations in basic terms are extremely high. Analysts at Goldman Sachs recently rocked the markets after releasing a report suggesting that these valuations are stretched, and against the average company in the S&P 500, it would seem that they are correct. But companies like Amazon are not your average company in the S&P 500, and the recent marketbeating performance can be justified by the fact that these are market-beating companies. The average growth rate for the S&P 500 is just over 2%, whereas for Amazon, it is around 20%. The company started in 1994 with founder Jeff Bezos selling books online from his garage in Seattle – today, the company is valued at $466 billion. Such stretched valuations and optimistic assumptions naturally draw comparisons with the infamous ‘Dotcom Bubble’ in the late 90s and early 2000s, which included some of the
same companies. That ended badly, with many businesses either folding (e.g. Pets.com, eToys.com) or suffering enormous losses in value (e.g. Cisco falling 86% in 18 months, or Intel 81% in a similar period). However, many firms emerged wounded but stronger, and for all the superficial similarities we see many more fundamental, and less worrying, differences. For one, the five largest technology stocks in 2000 (Microsoft, Cisco, Intel, Oracle and Lucent) at their peaks were trading at an average of 58 times their two-year projected earnings. This time, the figure is a ‘mere’ 23 times two-year projected earnings, with only Amazon above 25x, as reported by Goldman Sachs. In a similar vein, the five largest technology stocks in 2000 made up a larger proportion of the S&P 500 index’s total market capitalisation than currently – 15.8% in March 2000 compared to 12.6% in June 2017. “Amazon and Netflix, which have returned around 33% and 28% this year respectively, are two of the highest valued companies within this group.”
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