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Can Big Tech make a FAANG-tastic recovery?

In the slow lane: Tesla shares, led by Elon Musk, have crashed

How have the mighty fallen! There have been calamitous falls in the shares of what were called, in their heyday, the FAANG companies.

This is the group made up of Facebook – now Meta – Apple, Amazon, Netflix and Google now Alphabet.

Shares of Meta – owner of Instagram and WhatsApp – fell 56% amid doubts about its aim to master the metaverse.

In the slow lane: Tesla shares, led by Elon Musk, have crashed

In the slow lane: Tesla shares, led by Elon Musk, have crashed

Apple’s market capitalization has grown from $3 trillion to $2 trillion.

Over the next few weeks, results from some of these companies and other tech names will reveal the damage wrought by rising interest rates and unrest in China. Some Wall Street traders warmed to the sector, saying the gloom is now overdone.

Investors should remain cautious, even though tech funds have generated a record 463% return over the past decade. This calculation, by broker AJ Bell, takes into account the recent sale.

Our reliance on technology in all areas of our lives is increasing, but companies in the sector face significant challenges.

Some of these problems are the result of reckless spending in the era of easy money, especially for staff. Did Big Tech companies assume that the increase in demand for their services during the lockdown would be permanent and that they would continue to be (extremely) lightly taxed and regulated? Seems a bit low if they did, but maybe.

Now disruptors are being disturbed by intruders such as video app Tik Tok, a division of China’s ByteDance, and ChatGPT. This artificial intelligence software, able to answer questions and write, almost like a human, could compete with Google search. Microsoft has invested $10 billion in OpenAI, the creator of ChatGPT. Silicon Valley giants are laying off staff. In addition, stricter regulation is on the way and there could also be more onerous taxation.

A reassessment of what constitutes a tech company is underway, focusing on stocks such as Tesla, which seems unnerved by its boss Elon Musk’s takeover of Twitter.

Dan Brocklebank, chief investment officer of fund managers orbis, argues that Tesla should be considered an automaker instead, questioning why it’s worth five times more than General Motors. These are relevant questions, and not just for those who own Big Tech stock directly.

Tom Slater, director of Scottish Mortgage, the FTSE100 technology fund that owns Tesla, has apologized to shareholders (including myself) for misjudgments on China and the sustainability of Covid-induced changes.

Yet many other investors have exposure to Big Tech through global equity funds. Jason Hollands of Bestinvest says: “Global funds can be very US-centric, as US companies make up 68% of the MSCI World Index. Even at this level, I wouldn’t view Big Tech stocks as a gaudy bargain.

David Coombs of Rathbone sees Meta as particularly risky as it “burns capital”. But UBS sees Apple as a “buy” while acknowledging the slowdown in its app store. Barclays loves Amazon, saying Amazon Prime is “the app that kills e-commerce”.

Thanks to shows like Emily In Paris, Netflix reported better-than-expected revenue, profits, and subscriber numbers this week. Its new cheaper ad-level subscription seems to have more potential than initially thought. Jefferies, the broker, has already moved the shares from “buy” to “hold”.

Despite ChatGPT, Bank of America has selected Alphabet as one of its top picks for 2023. If you trust it, you have interests in both. This investment trust is one of Winterflood’s broker picks for 2023.

If you also review the contents of your global and technology funds, rejoice if you spot Microsoft. The group’s dominance makes it one of Citi’s biggest buys. Microsoft is the largest Fundsmith holding I put money into each month, although I don’t always agree with director Terry Smith’s proclamations.

You also need to check whether your funds fit the new, broader definition of a quality tech company. Alec Cutler of Orbis Global Balanced and Cautious Funds cites Signify, the LED bulb company, which was formerly Philips Lighting.

He also likes Siemens Energy and its next-generation hydrogen turbine.

Investec has downgraded Scottish Mortgage to ‘sell’, but I’m sticking with the confidence I’m sticking with Scottish Mortgage, in part because of the outlook for its unlisted holdings like ByteDance and Musk’s Space X. That’s my long-term bet on flying taxis and other innovations, which was never going to be easy.

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