Dividend Discount Model: Advantages
Dividend discount models are the first type of discounted cash flow models that we will study. The model simply discounts cash flows at a given rate just like any other DCF model. The difference lies in the fact that dividend discount models consider only “dividends” as being legitimate cash flows. Therefore, if a firm pays […]
Alternative Assets in Pension Funds
Pension funds across the world generally invest in traditional asset classes such as debt and equity. However, over the past few years, many experts have suggested that pension funds should branch out and invest in alternative asset classes. Theoretically, investing in alternate asset classes has many benefits. However, when the pension fund actually starts making […]
Dividend Discount Valuation: H Model
The dividend discount model makes a lot of assumptions. Some of these assumptions are not considered to be viable by analysts. For instance, consider the assumption regarding growth rates. During the horizon period, the analyst estimates that the growth rate will be high, let’s say 10% or 12%. Then, when the terminal value is to […]
Pros and Cons of Freemium Model
In the previous article, we have already learned what a freemium business model is. We now know that this model is widely used amongst the start-up community. We also know that this business model has several variations. In this article, we will have a closer look at what are the pros and cons of a […]
Nominal and Real Value of Money
The previous article was an introduction about the two basic decisions that corporate finance helps a corporation in making. Prima-facie, these two decisions may look pretty simple. After all everyone raises money in their daily lives and puts it to productive use. Simple accounting can tell us whether or not we should make those financing […]
Facebook, Amazon, Apple, Netflix, and Google are together known as the FAANG stocks in the stock market. These stocks have been the darling of the market for the past decade or so. Almost every investor has some of these stocks in their portfolio. However, it seems like the bull run for these stocks is over.
In the latest crash which happened in Oct and Nov 2018, the FAANG stocks have been the worst hit. In fact, these stocks have a lost a combined net worth of over $1 trillion during this downfall.
Since the value of these shares has fallen more than 20% from their peak valuation, it would now be safe to say that these companies are in a bear phase. The panic has started seeping to the other sectors of the market, and it doesn’t seem like the suffering is about to end anytime soon. After the fallout of the tech sector, the energy sector has also taken a beating.
In this article, we will have a closer look at what led to this tragic reversal of fortunes. Why are investors suddenly bearish about the FAANG stocks and want to get rid of them as soon as possible?
Concerns Facing Each of the FAANG Companies:
Lastly, Facebook has now found itself in a scandal over how it handles other scandals! Some investors are demanding the resignation of Mark Zuckerberg on the charges that he has hired an external PR agency to dig up dirt on competitors.
Instead of streamlining Facebook’s operations and getting to the root cause, Zuckerberg is wasting time and money finding faults with competitors. This has not gone down well with investors who started selling off the stock in large quantities.
For the past many years, Apple has been milking its iPhone model to increase its revenues. Investors are worried that consumers might soon get bored with the same old products.
It is likely that Apple will not be able to maintain the same kind of revenue that it has been able to do in the past. This is making the investors jittery, and hence they are willing to sell off their Apple stocks instead of holding on to them.
Also, Amazon’s sales are likely to take a huge hit in the European markets if a digital tax is introduced. Hence, it would be fair to say that the sentiment is negative for Amazon as well. This is the reason why its stock has been losing value.
Netflix needs more and more subscribers in order to stay competitive in the market. This is why any fall in the subscriber numbers has a direct effect on the stock price of Netflix.
Also, it has come to light that Google is building a separate search engine for the market in China. This search engine will work as per the censor norms decided by the Chinese government. As a result, it will not show the results of human rights violations and religious abuse in China. Events like these are spoiling the image of Google as well. The stock price of Google is very sensitive towards the perception of its brand image. This is the reason why the stock has been on a downward trajectory in the recent past.
The events mentioned above are catalysts which are causing the FAANG stocks to decline in value. However, these are not the events that are truly causing the fall. It seems like the market has suddenly realized that too much money is stuck in FAANG stocks. Most of these stocks have market value is which is 150x their current revenue. This obviously means that they are overpriced in the first place which is why the market is correcting the prices as and when it gets a chance.
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