Facebook (FB) has faced a lot of regulatory scrutiny as of late — from its plans to create a digital currency to the $5 billion fine announced today . But, it reports earnings after the close today most investors will strictly be focused on its revenue and earnings growth. 

Later this week and next we’ll hear from Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL) who also face a broad investigation from the Department of Justice. But again, it’s growth rates that matter most. 

Due to their huge market capitalization, these four companies, along with Microsoft (MSFT), whose stock surged to a new all-time high last week following its earnings report, represent nearly 10% of the S&P 500 Index.  They also account for over 50% of the market’s gains this year. 

These companies have become the largest and are among the best performing ones — because of their reliability to deliver something that has become scarce in the global economy, namely organic growth. And as with anything perceived as scarce, and getting its price rise, demand increases.  But will they eventually become overvalued? 

Certainly, the near-20% or some $30 billion in value, wiped out from Netflix (NFLX), following its report last week in which the number of subscribers actually declined in the U.S, can be taken as a warning shot.  But then again, NFLX valuation with its negative cash flow and huge debt, are quite a contrast to the other FAANGs that sit on gobs of cash and trade at reasonable multiples. 

It seems at odds that in a world in which there is over $13 trillion in bonds with negative yields, which would suggest investors view the financial landscape with a lot of concerns, uncertainty and are willing to pay merely for the safety of liquidity and confidence they will at least get their money back, people are piling to tech stocks which historically have had high volatility and high cyclicality. A study from Merrill Lynch cited, “Investors are now ‘buying what’s working’ more aggressively than usual: our 12-month price momentum factor is almost 25% more overvalued on forward earnings than usual.” 

One can see that the Vanguard Mega-cap Growth (MGK) has outperformed small-cap value by almost 20 percentage points this year.

It now may be worth asking whether this tilt toward these mega-growth stocks have not only become too crowded but if they have also overshot the mark. This week and next will go a long way to showing if there is still value in these growth names. 

NFLX shares were trading at $318.77 per share on Wednesday afternoon, up $11.47 (+3.73%). Year-to-date, NFLX has gained 19.10%, versus a 21.47% rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of Stock News.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

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