Musk's faith in Twitter comes at a tough time for tech

Elon Musk’s deal to buy Twitter may show that he, at least, believes there is still much more value to be unlocked from the social media platform.

At US$44bn the deal values Twitter at almost 40% more than its current share price would suggest, but that’s still 30% below its price of last year. The shares moved higher after the deal was accepted but were still below the deal price, suggesting the market is sceptical of Musk’s plans to boost earnings in the future.

Investors in giant tech companies have had their fingers burned recently. Inflation and tightening interest rates has seen tech shares fall back from their previously sky-high valuations and investors now want reassurance that earnings can be grown in this tougher environment.

A big test of that arrives as the world’s biggest tech companies update investors. Facebook owner Meta Platforms FB, Apple, Amazon, and Google parent Alphabet each issue results, meaning all of the so-called ‘FAANGs’ will have reported following Netflix numbers in April 2022.

These companies matter to most investors in the US stock market. Even if they are not held directly, their giant size and position at the top of the US stock market mean most pension and other funds will hold a large weighting in them.

Despite being grouped together, the growing evidence is that the performance of the FAANGs is now diverging, with each being subjected to its own headwinds. This could bring a further splintering of the group.

After subscriber numbers disappointed recently, Netflix is now firmly the laggard. The mystique of the FAANGs was that they enjoyed a forcefield against competitors, but Netflix faces numerous powerful rivals in the streaming space which means its growth might be slower than assumed. The global cost-of-living crisis is also putting pressure on consumers to cancel discretionary spending.

Facebook, now under the banner of Meta Platforms, has also faced difficulties and suffered heavy selling at the start of this year. Its aim of developing its social network in the ‘Metaverse’ - a virtual reality space connected to real-world actions - is going to take serious investment with an inevitable element of uncertainty about the likelihood of success. Its shares are now trading relatively cheaply at around 18 times earnings but the company will have to hit year-on-year revenue growth of at least 10% to meet expectations.

Amazon shares have fallen this year but it has clung on to most of the big gains it made during the pandemic. Amazon was the first pandemic winner as investors realised the huge shift to online that lockdown entailed. Earnings have grown ahead of forecasts in six of the past seven quarters and another 15% rise is forecast this time round.

Apple has fared the best of all the FAANGs this year, avoiding the deep falls that its rivals have seen and that’s reflected in its higher valuation, at around 28 times earnings. Apple has a great track record of hitting earnings forecasts. While suffering at the onset of the pandemic, it went on to make big gains as it became clear that many Apple consumers   were enjoying higher levels of disposable income.

Google, meanwhile, is on a run of beating forecasts for seven quarters in a row but faces a tough time to deliver an expected 17.7% rise in revenues.

Elon Musk’s deal for Twitter will get the headlines but the performance of the still-publicly listed FAANGs may tell us more about the health of tech, and stock markets.