GOLDMAN SACHS: Crowding in Big Tech is hitting dot-com bubble levels - but don't expect a similar implosion

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GOLDMAN SACHS: Crowding in Big Tech is hitting dot-com bubble levels - but don't expect a similar implosion
Goldman Sachs
  • Investor capital is the most concentrated in the five biggest tech companies in 20 years, but don't expect a dot-com bubble implosion to repeat itself, Goldman Sachs analysts wrote Friday.
  • The FAAMG group, consisting of Facebook, Amazon, Apple, Microsoft, and Google-parent Alphabet, currently account for 18% of the S&P 500 index.
  • That level hasn't been since since 2000, when the top five stocks of the time traded at a 47x price-earnings ratio, according to the investment bank. Today's five big tech firms trade at a price-earnings ratio of 30x.
  • Lower growth expectations, higher reinvestment, and lower valuations suggest the FAAMG group won't suffer the same kind of market implosion seen at the turn of the millennium, the analysts wrote.
  • Visit the Business Insider homepage for more stories.

Index concentration in the biggest tech companies is the greatest in 20 years, but a dot-com-style correction isn't likely, Goldman Sachs analysts wrote in a Friday note.

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The FAAMG collective, which includes Facebook, Amazon, Apple, Microsoft, and Google-parent Alphabet, accounts for 18% of the S&P 500 index, a level not seen since 2000. The crowding in major tech stocks resembles that seen in the turn of the millenium, when five major firms enjoyed outsized valuations before falling alongside US indexes in a prolonged crash.

The five major stocks of 2000 - Microsoft, Cisco, General Electric, Intel, and ExxonMobil - also accounted for 18% of the index at their peak, but today's FAAMG group isn't experiencing the same premium, the team of analysts led by David Kostin wrote. The cohort from 2000 traded at a price-earnings ratio of 47x, while today's Big Tech group trades with a price-earnings of 30x.

The older group also traded with anticipated next-year revenue growth of 15%, while today's collective sports 14% anticipated growth, the analysts noted.

"Lower growth expectations, lower valuations, and greater re-investment suggest the current concentration may be more sustainable than it proved to be in 2000," the analysts wrote.

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Today's Big Tech companies are also among the leaders in reinvesting in their own businesses, Goldman noted, boasting three-year growth investment ratios of 48% compared to the S&P 500's 21%. The five biggest companies of 2000 touted growth investment ratios of 26%, undercutting the index's ratio of 36% at the time.

Goldman's growth investment ratio is calculated by dividing growth capex and R&D spending by cash flow from operations.

Alphabet is the last of the five tech giants to report fourth-quarter earnings, and is scheduled to release its report after the market closes Monday. The rest of the companies beat estimates for their last reports of 2019, though Facebook investors balked at slowing growth in mature markets. Amazon posted the biggest post-earnings stock move of the FAAMG group and soared above a $1 trillion valuation in the following trading session.

Apart from Facebook, the tech cohort has enjoyed healthy gains in the year-to-date. Yet the ever-popular sector faces a slew of risks, according to the analysts, from privacy concerns to calls to break up the biggest tech companies. FAAMG companies remain favorites among hedge fund portfolios, but weakening interest from mutual funds and lasting threats to the firms' index dominance could keep investors from crowding further into the household names.

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