US tech shares CRASH – is this the buying opportunity of the year?
This year’s dramatic crash in the shares of US technology companies has wiped around $2 trillion off the valuations of household names such as Netflix, Amazon, Tesla and Facebook.
Few private investors will have escaped the fallout. Even those don't hold these stocks directly may have exposure via actively managed funds or passive index tracking exchange traded funds (ETFs).
The rise of big US tech has been the investment story of the last decade, making fortunes for investors who got in early.
The big question now is whether this is the end of an era, or a fantastic opportunity to pick up world-beating companies at reduced prices.
What’s happened this year?
Every hot investment trend needs its acronym. Before the financial crisis, it was the BRICs, as emerging giants Brazil, Russia, India and China shot to prominence.
Afterwards, we had the FAANGS, which stood for US tech giants Facebook, Amazon, Apple, Netflix and Google-owner Alphabet (they should have found space for Microsoft and Tesla as well).
Their sheer size is stunning. At last year’s peak, the big five of Google, Amazon, Facebook, Apple and Microsoft made up more than a quarter of the entire US S&P 500 index.
When Apple’s market cap hit $2.1 trillion, that made it larger than 96% of countries in GDP terms. That includes Italy, Brazil, Canada, and Russia.
Pandemic lockdowns only turbo-charged their growth, notably Netflix, Amazon and video conferencing firm Zoom. At its peak in October 2020, Zoom’s market cap stood at $559 billion.
Today it trades at a fraction of that, around $100 billion. Investors who caught the trend too late got stung, as they often do.
Zoom isn't the only struggler. By the end of April, Netflix was down 66% year to date, PayPal was down 53% and Facebook, now renamed Meta Platforms, had fallen 37%.
Amazon and Tesla had both fallen around 25%, with Alphabet down 20% and Apple holding relatively steady, slipping just 12%.
Tesla owner Elon Musk has shown that there is still appetite for big tech – witness his $44 billion bid for social media giant Twitter.
Should you be buying too (albeit on a much smaller scale)?
Why are they crashing?
The technology sector soared on the back of near-zero interest rates and trillions of dollars worth of central banker and government stimulus.
The days of easy money are now over as inflation rockets, forcing the US Federal Reserve and other central bankers to taper stimulus and hike borrowing costs, says Ed Monk, associate director at fund manager Fidelity International. “Tech stocks have fallen from their sky-high valuations. Now investors want reassurance that they can continue to grow their earnings in this tougher environment.”
When investors buy growth stocks, they are sacrificing profits and dividends today, for bigger profits tomorrow. That's great when inflation is low but when it's high and rising, it shrinks the future value of those earnings in real terms.
The FAANGs rose together, but they are sinking separately, Mr Monk adds. “Performance is now diverging, with each being subjected to its own headwinds.”
So rather than racing to dump your tech holdings, you need to look at the fundamentals of each company.
So what are the challenges now?
“One by one, tech stocks are running into genuine, bottom-up fundamental challenges,” says Eoin Maher, a director in the equities team at asset manager Unigestion. "While they might be great companies, investors are now grappling with the idea that they might not be great stocks.”
The sector is also a victim of its own success. Regulators are seeking to tame their power, while politicians have been greedily eyeing their billion-dollar revenues, and wondering why they aren’t paying more tax on them.
Another challenge is that globalisation is going into reverse, as the West grows wary of Russia and China. Mr Maher says: “Tech firms now face higher penetration rates and a less open global economy, on top of the slowdown in global GDP growth.”
In a further blow, the end of pandemic lockdowns is hitting stay-at-home heroes such as Netflix, Amazon, Peloton, Robinhood, Etsy, DoorDash, Zoom and DocuSign.
Consumers are feeling the squeeze as prices rise faster than wages, while new growth areas such as the metaverse, beloved of Facebook founder Mark Zuckenberg, remain unproven.
Mr Maher says many tech companies now face "slower growth rates, more competition and a higher cost of capital”, but there is good news, too.
Mega-cap tech stocks are now trading at more reasonable valuations, he says. “They retain strong competitive advantages, including superior balance sheets and the flexibility to allocate a lot of capital. Advertising revenues are cyclical but will recover, while cloud growth is likely to continue.”
The sheer size of these companies continues to deter competitors, Mr Maher says. “It’s in the nature of the tech industry that there will always be new players knocking on the door. More will fail than succeed.”
Big tech maintains another advantage, he adds. “With the exception of Meta, they all score well on an environmental, social and governance (ESG) basis, which is increasingly important for investors.”
What should investors do?
Netflix is the biggest worry as it has been hit hard by the end of lockdowns and tough competition from rivals, says Walter Price, manager of specialist investment fund Allianz Technology. “There are now too many streaming services for consumers to buy them all. The shakeout will hurt everyone.”
Mr Price has sold software stocks that benefited from the pandemic, such as Zoom, Docusign and Hubspot.
Online retailers, including Amazon, also have a fight on their hands. “Cash-strapped consumers are more wary of spending money for home delivery of food and other items,” Mr Price adds.
Yet he is standing by many of the big tech names. Apple, Microsoft and Tesla are Allianz Technology's top three holdings, with Alphabet at number five.
Mr Price is notably bullish about electric car maker Tesla, which has shrugged off supply chain disruptions to post rising earnings. “Higher gasoline prices and government support for charging networks has shifted the electric vehicle adoption curve upwards,” he says. He is backing Taiwan Semiconductor, despite a 14% share price drop this year, as he believes the sector has been “aggressively” oversold. Cloud adoption and cyber security also offer growth opportunities, but Mr Price says he has become "much more valuation sensitive", and is unwilling to overpay for future growth prospects.
The future for big tech now depends to a large degree on central bankers. Can they curb inflation without plunging the global economy into recession?
If they can, the tech superheroes could fly again. Although maybe not all of them. Choose wisely.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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