Jim Cramer loves when historical patterns pop up in the stock market, especially ones like the recent concerns about FANG stocks being overvalued and emblematic of the 2000 tech bubble.
“But you know that history doesn’t always repeat itself. In fact, there are times when it can lead you very much astray. For example, if you took your cue from 2000 when it comes to these red-hot tech stocks, the history did lead you astray, because 2017 is a very different story,” the “Mad Money” host said.
Cramer brought up a March 2015 story written for CNN Money that argued why, 15 years after the dotcom bubble burst, the tech titans of the day were not “at bubble levels.”
While Cramer found the piece to be very rational, not all analysts agreed. Many market-watchers thought history would repeat itself and avoided high-flying tech stocks, missing out on serious gains in the process.
“So, I decided to go back to see how FANG, my acronym for Facebook, Amazon, Netflix and Google, now Alphabet, was doing at that 15th anniversary when the piece was written, because I think it’s an excellent illustration of why you shouldn’t take these sirens of skepticism too seriously,” Cramer said.
In March 2015, Facebook traded around $81 a share. Cramer said that if investors had looked at the future earnings estimates then, they would have found that the stock traded at just 16 times 2017 earnings estimates, a fairly cheap valuation given that the stock now trades at $172.
“I think those are low-ball numbers, too, but the point is that if you looked at the right metric two years ago, it would’ve been obvious that Facebook was much cheaper than it seemed,” Cramer said. “That’s nothing like the Nasdaq peak in 2000.”
Amazon traded at $369 in March 2015. Investors who sold their shares missed out on a massive move to $992 as of Monday, but finding the right way to value the e-commerce giant was trickier than it was with Facebook, Cramer said.
“What you need to know is that if you looked at the numbers alone two years ago, you would’ve missed that Amazon was developing this incredible cloud-based web services business,” he said, referring to Amazon Web Services, which analysts say is now worth at least 40 percent of its business. “Hmm, what’s 40 percent of Amazon worth right now? How about $395? That’s right, the web services business alone is worth more than what the entire company was selling for a couple of years ago.”
Netflix, which was trading around $62 a share in March 2015, was a slightly different beast. Its valuation was always based on subscription growth, and back then, some two-thirds of its subscribers were domestic.
Investors did not expect the streaming giant to capture international interest. Now, with over half of Netflix’s subscribers buying in from overseas, the company’s stock trades at $181.
Finally, Alphabet, which traded at $555 a share back then, has climbed to $945. While the company has been under pressure of late, Cramer said its metrics still held with his theory.
“Given the 2017 numbers we should use, both the estimates and what’s in the can, the stock’s trading at 16 times earnings. That’s before you back out the humongous cash hoard. It’s dirt cheap, people,” he said.
So while Cramer is still a firm believer of having a diversified portfolio that mixes these high-growth tech names in with more stable investments, he noted that the “eternal pessimists of technology” can often be wrong.
“I’m simply trying to make the point that we need to stop thinking of these high-flying tech stocks as being dangerous landmines that could detonate upon contact,” the “Mad Money” host said. “As long as you remember that history doesn’t necessarily have to repeat itself, you might want to buy one of these high-octane tech stocks on the next dip. Otherwise, maybe you’re missing an opportunity, and this opportunity only gets better when the high-fliers pull back and everyone starts freaking out.”
Disclosure: Cramer’s charitable trust owns shares of Facebook and Alphabet.
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Source: Investment Cnbc
Cramer explains why history doesn't have to repeat itself when it comes to tech giants like FANG