For the last few years, the tech industry has been one of Wall Street's leading sectors for investors. The explosion of Silicon Valley startups and the expansion of industry leaders such as Apple have made it an appealing and, more importantly, a stable stock option.
However, a rough day on the markets might show that, despite the success, those companies may not be completely invulnerable. Could this lead to another tech bubble?
Market Hit Hard
It was a perfect storm of events for tech stocks on Friday, June 9, that caused some noticeable stock drops. But the day didn't start out that way for a few companies. That morning, Goldman Sachs declared FAAMG the strongest stocks in the tech space. FAAMG stands for Facebook, Amazon, Apple, Microsoft, and Google (Alphabet) and is a replacement for FANG, which included Netflix instead of Apple and Microsoft. These five FAAMG companies were put up there because each acts as drivers on Nasdaq and S&P, whereas FANG was investor focused.
However, the afternoon saw things take a downturn for the market. It started with a paper published by Citron Research on Nvidia. Citron claimed in the paper that Nvidia had become "casino stock" since investments were made more on future potential instead of long-term guarantees. Citron suggested selling while stock was high and purchasing stock in Google.
Apple took a hit as well because of the latest iPhone 8 rumor. Bloomberg published a story claiming that the iPhone 8's network speed wouldn't be as fast as its competition. This caused an immediate drop not long after Apple celebrated a near record high in stock value.
A Second Bubble?
While the drop was immediate, it's likely to be a short-term drop for the market. But it is worth asking if there's a chance of a second tech bubble emerging. While looking at the FAAMG companies, Goldman Sachs studied the current market standing of FAAMG against the industry leaders who were caught in the 2000 tech bubble. These companies included Lucent, Cisco, Oracle, Intel, and Microsoft.
Goldman Sachs found that both FAAMG and the 2000 companies were in similar standing. Each group was stock and industry leaders, hitting record numbers at their respective time. There's also the fact that FAAMG stocks are among the least volatile stocks on the market. Goldman Sachs warned that this could lead to investors underestimating the potential risks that are still real with these companies. These include tax regulation changes or potential antitrust charges that could disrupt market stability.
That said, there are a couple silver linings that should dampen fears. While the tech market saw massive success in the leadup to the 2000 bubble popping and the 2008 housing bubble, the market saw similar occurrences in 1993 and 2005. The market just evened out after hitting big highs and avoided any market bubbles. Then there's the cash flow of the FAAMG companies, which is eight times higher than the companies in the 2000 bubble. The bubble companies were driven more by assets and profit margins whereas the current five are driven more by capital.
So while there are reasons not to fret, this does affirm that a second bubble is still a possibility, though it will depend on circumstances.