3 looming challenges facing these iconic tech stocks

The hot FAANG+ M [Facebook, Amazon, Apple, Netflix, Google, and Microsoft] stock trade could be at risk of unwinding before year-end as Mr. Market re-rates the favored group amid several growing risks.  

"There are some headwinds against the group that did not exist pre-pandemic. Firstly, the base effects of earnings over the next 12 months make the hurdle for positive surprises a lot harder. Secondly, the bipartisan push to regulate major technology companies has turned from a wild card to one in which policy uncertainty is growing," warned Jefferies strategist Sean Darby in a new research note to clients. 

Just last week, for instance, the Biden administration signed an executive order to create greater competition in business with an eye toward corralling the tech industry's yawning power. Under the order, the Federal Trade Commission (FTC) and Justice Department will see their influence emboldened, surmises Darby. 

"Looking forward, it would seem that the main risk is that acquisitions by the FAANG+M will come under heavy scrutiny making organic growth the likely route," Darby warns. 

One of the final headwinds facing the group is none other than tax policy uncertainty. 

Historically, the FAANG+ M complex has paid very low tax rates compared to other multinationals, fanning the flames of policymakers globally. Now, the winds are beginning to blow harder against the bottom lines of Big Tech as cries for higher taxes intensifies.

"While it is expected to be implemented by 2023 [the G20 created a 15% global minimum tax rate], President Biden will need congressional approval for at least some of the segments of the proposal. Our view is that the best of the low effective tax rates is over and investors should expect an incremental rise in tax paid over the next decade," Darby explains.

Investors appear to be severely overlooking these headwinds to the group at their own risk, oddly enough. 

Apple and Amazon shares are up 14% and 11%, respectively, in the past month. Netflix — one of the least exposed to the risks above — has seen its stock rocket 10% in four weeks time. Microsoft is up 7.7%, while Facebook has added 6.5%. 

While off their highs, the stocks continue to trade at some of the richest valuations in their history (see above charts).

Concludes Darby, "The bottom line is that while the FAANG+M stocks are the iconic play on growth as inflation and rate expectations peak as well as being the perfect disinflation play, there are likely to be subtle differences between their pre- and post-pandemic performance."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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