Big Tech’s Bad Day
The selloff in tech stocks Wednesday was less surprising than the rally in downtrodden names
By Dan Gallagher
VALUE TRAPPED
Price as multiple of forward wearnings
The rubber band snapped back.
A wave of selling hit technology stocks on Wednesday, which isn’t that surprising after their big run-up. What made the move potentially significant is the rebound in certain downtrodden stocks, which rose more than the tech giants fell.
The Nasdaq-100 Technology Sector Index, which contains the industry’s biggest names, fell by more than 3% Wednesday. That follows a gain of more than 40% this year compared with a 28% rise for the broader Nasdaq Composite. Several tech subgroups, such as chips, internet and software, were hit particularly hard.
Market watchers seemed perplexed by the sudden shift, but it was a day for doubts to creep in about frothy assets everywhere. Bitcoin, the red hot cryptocurrency that started the year worth around $1,000, cracked the psychologically significant $10,000 mark overnight and then $11,000 in early trading Wednesday before sinking to near $8,500 within hours.
Yet the day’s trading action wasn’t a classic risk-off moment, in which recently loved stocks or assets plunge and dowdy ones such as bonds or dividend-paying stocks represent a relative safe harbor. Instead, it was a swift and brutal rotation. The shares of companies that have been almost a mirror image of technology shares saw perhaps their best day of the year, even when they had nothing to do with one another.
Many of the names in question share two things in common—they had been doing as poorly as tech stocks had been doing well, and they are perceived to be vulnerable to the rise of Amazon.com. For example, home-goods retailer Bed Bath & Beyond rallied by as much as 8.5% after being down by 46% year-to-date through Tuesday, sporting goods chain Foot Locker rallied as much as 7% after having been down by 42% and drugstore chain Rite Aid was up by over 20% at one point but had been down by 77% for the year.
Amazon, by contrast, was down nearly 3% by the afternoon even as the company was unveiling the latest additions to its fast-growing AWS cloud service, as well as boasting of record sales during Cyber Monday. None of those was cause for disappointment. But Amazon’s share price had just tipped a fresh record high two days prior after having jumped 60% for the year. Its valuation of more than 190 times forward earnings proved a ripe target for skeptics.
A similar dynamic affects other big tech names. Investors have poured into megacap techs like Amazon, Facebook, Apple Inc. and Google parent Alphabet Inc. on the assumption that their massive scale will continue to accrue growth at the expense of older or more traditional competitors. That isn’t inaccurate, though the swelling valuations may also be ignoring the growing risk that scale brings—particularly in the form of lawmakers openly wondering if the sector is growing too powerful.
The risk of scrutiny remains hard to quantify but doesn’t yet seem priced in. The Nasdaq Composite is now averaging 23 times forward earnings—its highest multiple in at least 10 years. That isn’t yet a reason to flee the sector, but investors looking to lock in some profits clearly didn’t need much of a push.
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