Tech

Why FANG stocks are hitting record highs despite US-China trade fights

Key Points
  • Technology stocks have rallied despite trade tensions between the U.S. and China.
  • Facebook, Netflix and the tech-heavy Nasdaq index hit record highs on Wednesday.
  • Many large tech stocks have very little exposure to China and continue to grow rapidly, making them attractive for investors.
Facebook CEO Mark Zuckerberg speaks during the F8 Facebook Developers conference on May 1, 2018 in San Jose, California.
Getty Images

Even as technology gets dragged into the growing trade tensions between China and the U.S., stocks in the sector continue to rally to record highs.

Earlier this month, President Donald Trump announced plans to slap a 25 percent tariff on up to $50 billion of Chinese goods, including technology related to semiconductors. There is also concern that some U.S. companies could be forced to stop providing products to Chinese firms.

For example, U.S. lawmakers urged Google on Wednesday to end its partnership with Chinese smartphone and telecoms equipment maker Huawei. U.S. companies were also recently banned from selling products to Chinese firm ZTE, a move that Trump's administration is now trying to overturn.

With technology in the cross-hairs of the trade issues it may seem counter-intuitive that tech stocks are rallying, but there's a number of reasons why.

On Wednesday, Facebook and Netflix both hit new all-time highs, which helped drag the tech-heavy Nasdaq index to a record close. Facebook rose 2.3 percent and Netflix was up 2.9 percent. Netflix has no presence in China while Facebook has been blocked in the world's second-largest economy for several years. This gives them very little exposure to the Chinese market, as explained in this recent CNBC analysis.

Meanwhile, Amazon was 0.8 percent higher and Google parent Alphabet was up 0.46 percent. Amazon again has little exposure to China even though it does operate there. Google's search service has been blocked in China since 2010 and many of its products are too. But it does make the Android mobile operating system which is used by the majority of smartphone users in China.

Since the start of June, the so-called FANG stocks — Facebook, Amazon, Netflix and Alphabet, which owns Google — have rallied sharply. Netflix is up 18.5 percent, Amazon is up 7.6 percent, Facebook is nearly 6 percent higher and Alphabet rose 7.6 percent. This is despite the U.S.-China trade dispute because they are isolated from it.

However, Apple, the world's largest company by market capitalization, is down 0.2 percent. That's because it has quite a large exposure to China. In its fiscal year ended September 2017, it made nearly 20 percent of revenues from China and it was the fifth-largest smartphone player in the market last year.

Still, the drop in share price this month has been very small. Much of that is supported by the fact that Apple is buying back large amounts of shares, according to Neil Campling, co-head of the global thematic group at Mirabaud Securities.

"Apple is unique because, like many large cap tech stocks (Microsoft, Intel etc.) they have a significant buyback and providing an underlying bid to the market. Any short-term pullbacks are likely being bought by the corporates themselves," Campling told CNBC by email on Thursday.

Apple recently announced a $100 billion share buyback plan.

Analysts also said that the big technology firms continued to show strong revenue and earnings growth, which makes them attractive for investors, despite many of the geopolitical issues taking place.

"These are phenomenally good companies that in Q1 shot the lights out in terms of revenue growth. So the big beasts are delivering huge returns and profitability and cash flow," Alan McIntosh, CIO at Quilter Cheviot, told CNBC's "Squawk Box Europe" on Thursday.