Big Tech’s valuations are cheapest in three years after slump

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After a monthlong selloff, an elite group of technology stocks is now cheaper than it’s been versus the broad market in almost three years.

The NYSE FANG+ Index is priced at about 27.6 times estimated earnings for the coming year versus 20.2 times for the S&P 500 Index. That’s the narrowest spread since December 2018, when markets slumped because of a U.S.-China trade war, a hawkish Federal Reserve and falling earnings expectations.

Fast forward to 2021 and the picture looks similar, with the Fed at the brink of pulling back on economic stimulus and the pace of earnings upgrades in the slow lane.

One key reason the tech index’s valuation has fallen from almost 37 times earnings in February: Its two Chinese stocks, Alibaba Group Holding and Baidu, have plunged because of increasing regulation in their home countries. They’re now the cheapest stocks in the benchmark at less than 15 times earnings.

The FANG+ Index consists of 10 companies, including Apple, Google owner Alphabet Inc. and Amazon.com, with a combined market value of $8.7 trillion.

Among its U.S. members, Facebook, at 19 times earnings, is now cheaper than the S&P 500. Electric-vehicle maker Tesla is the priciest stock at 114 times. Facebook is fighting accusations that it puts profit over user safety, and it had a massive outage on Monday.

“With the reopening ongoing, the question is to what extent they can keep up the massive sales and earnings growth,” said Jeroen Blokland, head of research firm True Insights. “Having said that, some of the long-term secular tech trends still help tech, of course.”

The megacap tech stocks may get cheaper still. Stock-index futures point to a 1.1% drop for the Nasdaq 100 Index at the open, and Citigroup’s chief global equity strategist Robert Buckland joined the chorus on Wednesday of those saying tech is likely to get hit harder by rising bond yields.