We know stocks are generally down this year.
And we know the so-called MegaCap-8 stocks – Netflix, Nvidia, Meta, Alphabet, Microsoft, Amazon, Tesla, and Apple – have also been hit.
But it’s instructive and interesting to compare and contrast the stock performance, earnings forecasts, and price-to-earnings ratios of these widely popular companies from the technology peak of late last year with today.
Ed Yardeni of Yardeni Research takes us through the numbers with some helpful charts to explain why the MegaCap-8 have lost some of their once unassailable might.
by Ed Yardeni, President, Yardeni Research
The elevated inflation readings in Tuesday’s CPI report caused continued MegaCap-8 stock price deflation.
The specter of harsher-than-expected Fed tightening is no friend to these high-valuation tech stocks.
Once high-flying market leaders, the MegaCap 8—i.e., Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, and Tesla—collectively has fallen far harder than the broader market in recent days.
Collectively, the MegaCap-8 lost 6.1% on Tuesday and 27.2% year-to-date (ytd) through Tuesday’s close—greater than the comparable declines experienced by the S&P 500 (-4.3%, -17.5%, respectively) and the S&P 500 Technology sector (-5.3%, -24.5%) (Fig. 1).
Individually, only two of the eight outperformed the S&P 500 over one or both of those time spans, Tesla by just hairs and Apple only ytd:
- Netflix (-7.8%, -63.8%)
- Nvidia (-9.6, -55.4)
- Meta Platforms (-9.4, -54.5)
- Alphabet (-5.9, -27.2)
- Microsoft (-5.4, -25.1)
- Amazon (-7.0, -23.9)
- Tesla (-4.2, -17.1)
- Apple (-5.9, -13.4)
Despite its decline over the past year, the MegaCap-8 still makes up 23.1% of the S&P 500’s market capitalization as of Tuesday’s close.
That’s down from a peak of 26.4% on November 19, 2021.
It’s particularly tough for Growth style investors to avoid these large-cap stocks, which represent nearly half of the S&P 500 Growth index’s market capitalization (Fig. 3).
While each of the MegaCap-8 members has taken it on the chin, the ytd performances of Meta Platforms, Netflix, and Nvidia stocks have been particularly devastating.
Earnings forecasts for those companies have been sharply pared back after various Q2 missteps:
Meta Platforms’ advertising revenue declined, Netflix shed subscribers, and Nvidia’s earnings growth was hurt by the drop in semiconductor chip sales for gaming PCs.
Analysts’ expectations for the group of eight have become more realistic in the wake of dour earnings news and the stock market selloff.
Analysts project long-term (typically three-to-five years) earnings growth for the MegaCap-8 collectively of 18.6%, down from the peak 38.9% that analysts forecast on April 26, 2019.
Here’s the long-term earnings growth analysts expect today and what they expected in 2019:
- Tesla (52.3%, 65.4%)
- Amazon (33.3, 94.0)
- Nvidia (23.4, 6.7)
- Microsoft (15.2, 15.0)
- Alphabet (13.7, 17.6)
- Apple (8.8, 13.0)
- Netflix (7.7, 49.0)
- Meta (4.9, 19.1)
As forward earnings expectations deflated, so too did forward P/Es (i.e., the share price divided by forward earnings, which is the time-weighted average of analysts’ consensus operating earnings-per-share estimates for this year and next).
Following Tuesday’s selloff, the MegaCap-8’s forward P/E is 25.2, down from a peak of 38.5 on August 28, 2020.
The S&P 500’s forward P/E of 16.9 as of last Friday declines 1.9 points to 15.0 when these eight stocks are excluded.
During August 2020, the MegCap-8 had added 3.0 points to the S&P 500’s P/E of 22.9.
Sometimes, the forward P/E has fallen in recent years because the company started to produce earnings, as was the case with Tesla.
But in other situations, the P/E shrank because the stock price fell sharply, as was the case with Netflix and Meta.
In nearly all cases, their forward revenue and earnings growth expectations have slowed considerably.
Here are the forward P/Es for the MegaCap-8 members today and on August 28, 2020 when the MegaCap-8 forward P/E peaked:
- Amazon (72.0, 85.1)
- Tesla (53.9, 163.2)
- Nvidia (31.9, 51.7)
- Microsoft (23.8, 34.7)
- Apple (23.9, 32.6)
- Netflix (20.6, 66.1)
- Alphabet (14.3, 31.2)
- Meta (14.3, 31.1)
In the couple of years prior to the peaks—i.e., from 2017 through 2019—the MegaCap-8’s collective forward P/E bounced around 24.
If valuations revert to that level from 25.2 on Tuesday, the group’s shares would have a bit further to fall.
But the distance from that possible foothold is narrower than it’s been for the past two years, since the start of 2020, when the forward P/E was bouncing around 31 (Fig. 8).
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