Rout in technology stocks reveals plenty of room for deflation
Fundamentals look solid but the sector may be changing after the long bull run
RICHARD WATERS
Remember when Amazon was a trillion-dollar company?
That was all of five weeks ago. Nearly $150bn has been lopped off of its value since then — more than the combined value of Target and Costco, two of the most successful US retailers.
This is a good reminder of how much room for deflation exists after the long bull run in tech stocks. Wednesday’s rout in tech brought the entire market down, just as the sector has led the market up.
The fundamentals of Big Tech still look solid — at least as long as the threat of stringent new regulation remains in the background. But there is still plenty of room for a significant haircut if the market’s mood turns.
Judged on most valuation metrics, the sector does not look massively stretched, and clearly any comparison to the last tech bubble is unwarranted. But a price/earnings ratio in the high teens still leaves room for an adjustment that would reverberate through the wider market.
Even a relatively modest shift can have outsized consequences. Between them, the four tech companies that are still worth more than $500bn — Apple, Amazon, Microsoft and Alphabet — lost $200bn in market value on Wednesday.
A more pronounced deflation has already eaten into Chinese internet stocks that were more conspicuously over-valued. Alibaba is off 35 per cent from its high this year, while Tencent is down 42 per cent. It was not long ago that Alibaba’s market value seemed about to eclipse that of Amazon, in a symbol of the inexorable rise of China Inc. Now the Chinese ecommerce leader is only worth about 40 per cent as much as its US counterpart.
A shock like the one that passed through Wall Street this week leaves an inevitable question: how much does it reflect the mood of the wider market, and how much is it a harbinger of changing times in the sector itself?
The spectre of rising interest rates and escalating trade tensions has hit the market at other times this year, with tech first in the line of fire. But predictions that the sector’s leadership was about to be eclipsed have proved premature.
This week’s retreat came with an added twist. It coincided with the announcement of new restrictions from Washington on Chinese investment in US tech. If protecting American intellectual property is at the heart of trade tensions — and not just an excuse cooked up in Washington to justify a confrontation — then it might seem that tech companies will be among the most vulnerable to retaliation.
But it is hard to see recent market movements as a direct response to China risk. Apple — which derives 20 per cent of its sales in China and is deeply dependent on a supply chain there — might seem one of the most exposed. Yet its stock has fallen only half as much from its peak as Amazon and Alphabet, which are relatively unaffected by what happens in China.
Meanwhile, if Big Tech was the most conspicuous victim of this week’s market tremor, the shock has been felt much more among other companies in the sector that trade on higher multiples of earnings — or that make no profits at all.
Tesla and Netflix each lost about 10 per cent of their value on Wednesday, and each has fallen harder from their highs. Dependence on favourable capital markets to keep raising money for expansion adds to the risk for companies like these. In that light, efforts by Elon Musk to show his electric car company can wean itself off its dependence on fundraising and become a sustainable business sound well-timed — though there are serious questions about whether Tesla’s business has reached that point yet.
Against the background of a more volatile market, things could start to look ominous for other tech companies that are now eyeing a stock market listing.
Money has been pouring into private tech companies this year, with rounds of $100m or more becoming almost routine. In the US, the amount of venture capital invested is on track to top the record $100bn that was put to work in 2000, the peak of the dotcom bubble.
Many of the investors piling into these late-stage private companies are counting on being able to cash in on an IPO, with 2019 already shaping up to be a banner year.
The end of the last tech bubble only arrived after public investors had had their chance to drink deeply from the punchbowl. This time, it is starting to look like an open question whether the party will last that long.
richard.waters@ft.com |
