The Big Tech Selloff – WSJ


Herbert Stein famously observed some 40 years ago that what can’t continue won’t, which bears remembering as tech stocks fall following a fantastic nine-year run fueled in part by the Federal Reserve. Americans no doubt wish that stocks could climb forever, but the tech selloff looks like a healthy correction.

Stocks bounced back Wednesday, but before that the tech-heavy Nasdaq had slumped 12% since its August peak. Falling FAANG stocks—

Facebook
,

Apple, Amazon, Netflix and Google parent Alphabet—have swung the S&P 500 into a correction zone. Netflix tumbled 21% and Amazon fell 20% in October.

Texas Instruments
,

IBM

and

Nvidia

have also seen substantial stock price declines.

A tech revaluation was perhaps inevitable as prices leapt over earnings like LeBron James over Kevin Durant. Amazon’s stock in September was trading at nearly 160 times earnings, which wasn’t going to last. But what makes this month’s tech sale so jarring is that it comes amid strong quarterly earnings growth.

Google reported advertising revenues increasing by 20% year-over-year during the third quarter. Amazon’s subscription service revenues were up 52% during the quarter after raising prices for its Prime membership. Margins for Amazon’s cloud business rose a spectacular 77%.

Microsoft
’s

cloud-computing revenues soared 76%, and even its Windows software sales ticked up.

Investors are no doubt reacting in part to signs of slowing revenue growth and increasing costs. Amazon is raising its minimum wage to $15 per hour and has projected weaker sales in the fourth quarter. Google’s share of digital advertising sales are starting to dip while the traffic acquisition costs it pays to partners to direct customers to its search engine are increasing. Facebook reported soft revenue growth as it struggles to squeeze more advertising revenue from its news feed. It has also hired thousands of new employees to remove violent content and fake news. Netflix has gone on a spending-and-debt binge.

The bigger systemic worry among investors is softening global growth. The fastest growing markets for many U.S. tech companies including Netflix and Facebook are overseas. Amazon is making a major play for India. As demand for $1,000 iPhones plateaus in the U.S., Apple will need to increase sales of handsets and other devices overseas.

So it’s not auspicious that GDP growth in the eurozone fell to a five-year nadir last quarter. China’s growth is under pressure amid trade uncertainty and rising debt, while emerging markets in general continue to cause apprehension.

Hostile regulators are also acting as a restraint on growth. The European Union’s privacy regulations are making it harder for Facebook, Google and

Twitter

to monetize user data. Brussels in July fined Google $5 billion for dubious antitrust violations and is now investigating Amazon for allegedly using consumer data to undercut local merchants.

Then there’s U.K. Chancellor Philip Hammond’s proposal this week to tax the revenues of large U.S. tech companies. More than a dozen other countries including South Korea and Mexico are considering their own digital taxes, and don’t be surprised if the idea catches on in U.S. states and cities.

The silver lining for consumers is that tech giants are facing more competition. Amazon is starting to chip away at the Facebook-Google digital-ad duopoly.

Walmart
,

Target and other brick-and-mortar retailers are improving online operations to compete with Amazon.

Disney

is buying the film and entertainment assets of

21st Century Fox

to include in a new streaming service with exclusive content that could test Netflix’s hegemony. Businesses stand to benefit from IBM’s purchase of Red Hat if it can challenge Microsoft and Amazon in the cloud space by integrating myriad data systems.

It’s not surprising that investors are struggling to price tech stocks properly amid this evolving regulatory and competitive landscape while factoring in stronger U.S. growth and rising interest rates. Big tech was one of the few industries that prospered during the economic malaise under Barack Obama and thus naturally attracted more investors.

Tech stocks also received a boost from the Fed’s monetary exertions that kept the federal funds rate at nearly zero for years and suppressed long-term rates with quantitative easing. Investors thirsting for higher yields piled into riskier assets, and some are now retreating as the Fed unwinds its balance sheet and raises rates.

This return to realism is unfortunate for some investors but shouldn’t undermine the larger economy. The S&P is still up 21% since January 2017. It isn’t bad news if investors steer more capital to other productive businesses that can propel American growth.

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