Can big tech stocks protect investors from market risks?
The market is a scary place to be right now — with several big risks dragging stocks down. But large tech stocks, which have qualities to help them withstand market downturns, look like safer bets to park some money. Here’s why:
- Resilience — The majority of these large tech companies are highly profitable with products that can withstand recessions.
- Price — According to Bloomberg, the NYSE FANG+ index, which tracks the return of the largest global tech stocks (i.e. Apple, Amazon, Tesla, Nvidia and Alibaba), is trading at its lowest valuations in nearly 3 years.
But some of the companies on the FANG+ index — which are trading significantly cheaper than the S&P 500, are at risk of becoming landmines.
Chinese tech stocks, Alibaba and Baidu, which lost over half their value this year, are still at risk of Chinese regulations. And Facebook is dealing with its own set of issues.
Standing out: Among the large tech stocks, one company stands out — Alphabet (Google) — who’s showing resilience from current market risks:
- Supply chain crisis — More than 80% of Alphabet’s sales come from digital ads.
- Chinese regulations — Alphabet’s products are already banned from China.
- COVID resurgence — Alphabet’s products benefit from consumers stuck at home.
- Inflation — In the past year, Alphabet’s advertising costs have gradually increased, protecting it.
Alphabet is also pulling out some monster stats as the advertising industry recovered in 2021:
- Beyond Google Search, Youtube grew 84% last quarter and its cloud division also grew 54%.
- In 2020, Alphabet generated over $40B in cash flow with 20% profit margins.
- Google dominates the search industry — with 92% market share.
Despite rising 60% this year, Alphabet trades at a 30x price-to-earnings — lower than the S&P 500 average. Sticking with high-quality companies is one way investors can ride out a tough market.