Shares of Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX) are rocketing so quickly to new record highs that a growing number of investors and market watchers see danger signs for these two stocks and the entire market, CNBC reports. For one, the mania surrounding these stocks brings back memories of the Dotcom Bubble, which was followed by a market crash once investors returned to their senses. "To me, it looks like 2000, 2001, when these companies were getting so high-priced and there was such a craze about them," as Michael Bapis, partner and managing director of The Bapis Group, a wealth management practice affiliated with HighTower Advisors LLC, told CNBC.
'Not Really A Healthy Sign'
Speaking of big tech stocks such as Amazon and Netflix, Bapis added in his remarks to CNBC, "They've driven the markets for two-and-a-half, three years so you've got to see a pullback." Craig Johnson, chief market technician at Piper Jaffray, expressed similar concerns to CNBC: "Both Amazon and Netflix are making new highs whereas a lot of other indexes aren't. When we've seen this kind of narrow market breadth, it's not really a healthy sign for the overall market."
Netflix has also attracted the attention of short sellers. Andrew Left at Citron Research told CNBC today that Netflix can be shorted back to $300 a share. The stock was down about 3.7% as of 2:30pm in New York trading.
'Amazon Does Not Play By The Rules'
Year-to-date, through the opening on March 12, Amazon was up by 36.2% and Netflix by a breathtaking 73.8%. By comparison, the S&P 500 advanced by 4.4%. With these high-flying prices come celestial valuations, with forward P/E ratios of 155 for Amazon and 108 for Netflix, versus 17 for the S&P 500, per CNBC. The valuation of the S&P 500, meanwhile, is itself stretched by historic standards. (For more, see also: Why The 1929 Stock market Crash Could Happen In 2018.)
Speaking of Amazon, Bapis told CNBC, "It does not play by the rules of traditional stock earnings and P-E ratios. It's hard to buy companies trading at 250-plus times [12-month trailing] earnings that have run up so much." In this vein, Scott Galloway, a professor of marketing at NYU, has claimed that Amazon's core competency is storytelling. In his view, Amazon has investors hooked on prospects of yet more growth, convincing them to be unconcerned about meager current profits. (For more, see also: 4 Reasons These Giant Tech Stocks May Be Unstoppable.)
Leading the FAANGs
Other analysts and investment managers already have been sounding the alarm about narrow market leadership by technology, or technology-oriented stocks, including Amazon and Netflix. When just a few stocks are driving much of the rise in a capitalization-weighted index such as the S&P 500 Index (SPX), any downturn in their prices will send the index tumbling, creating a vicious circle when panicked investors sell other shares in response. (For more, see also: Why Amazon, Microsoft, Netflix Pose a Risk to Stock Market.)
Amazon and Netflix officially are classified as consumer discretionary stocks, given their respective core businesses of online retailing and online entertainment streaming. Nonetheless, they are frequently treated as technology stocks, as members of the FAANG group that also includes Facebook Inc. (FB), Apple Inc. (AAPL), and Google parent Alphabet Inc. (GOOGL). Year-to-date through the open on March 12, these three are up by 5.0%, 7.0%, and 10.6%, respectively, per adjusted closing price data from Yahoo Finance. While these gains beat the S&P 500, they nonetheless pale beside the incredible rise of Amazon and Netflix. (For more, see also: FAANG Stocks Get Their Bite Back.)