Technology meltdown is just smothering Wall Street’s bulls
This year has been an annus horribilis for Big Tech in the US and Asia. Facebook’s data privacy scandal after voter profiling firm Cambridge Analytica misused the personal data on 50 million FB users to tilt the 2016 Presidential election, where 40,000 swing voters in Michigan, Wisconsin and Pennsylvania could have denied Donald Trump the White House.
The scandal has now cost Facebook $80 billion in market cap. Trump had publicly threatened Jeff Bezos for daring to oppose his agenda via his ownership of the liberal Washington Post. Bezos is the co-founder and CEO of Amazon.com whose shares have fallen due to political backlash since it hurts Trump’s mom-and pop retailer vote bank as well as billionaire Republican donors who happen to own shopping malls. Amazon was down 7 per cent intraday on the Nasdaq.
Tesla had its worst month since 2010 as Moody’s downgraded the shares while US Federal regulators investigated yet another fatal California crash. The killing of a woman pedestrian by a Uber selfdriving car and the 60 per cent plunge in Bitcoin since December has been a disaster for New Age chip firm Nvidia. Morgan Stanley has cut the outlook for iPhone shares. Washington’s $60 billion tariffs against China is a threat to one of America’s most complex tech supply chains. In the US and EU, Big Tech faces a regulatory backlash and epic litigation fines that reminds me about the fate of global money center banks in 2009. A militaristic neocon John Bolton has replaced Lt-Gen H.R. McMaster as Trump’s new White House advisor at the same time as China’s Commerce Ministry has warned Washington of “unintended consequences” from its protectionist policies.
Technology is 25 per cent of the S&P 500 index now and its biggest megacaps are Apple, Amazon and Google. I doubt if the second quarter will ignite a major bull run for US equities even though the valuations of the S&P 500 index has now fallen to 16.4 times. The fall in the ten year US Treasury note yield to 2.77 per cent has led to a steep fall in banking shares as their net interest margins compress when the yield curve flattens. The surge in Libor increases the funding costs of both banks and their corporate borrowers. Without leadership by Big Tech and Big Banks, it is mathematically impossible for the S&P 500 index to outperform.
Even though Facebook seems compelling value to me at 150 or 18 times forward GAAP earnings yet I can easily envisage the shares falling to 135 as its founder Mark Zuckerberg testifies before an enraged Congress — and possibly even the British Parliament and the European Commission in the future. Facebook faces myriad risks to its business model — higher regulatory compliance costs, exodus of talent, EU and US fines, and loss of digital advertising contracts. I remember Facebook traded at $26 a share in July 2013 and the CIO of a Dubai family office told me it was “too expensive”. I disagreed. Four years later, Facebook traded at a high of $195 before its latest fall from grace.
I am far less sanguine on Tesla, which has fallen 25 per cent in the past month, its worst since the 2010 IPO. Tesla’s Autopilot technology is now clearly under threat, an existential threat to its electric car business model. I was also alarmed that Moodys cited Model 3 production delays and high cash burn in its credit downgrade. Tesla’s 2025 bond trades at only 86 cents or a de facto junk yield of 7 per cent. Tesla will need to raise money at the worst possible time and I can easily envisage its shares falling to 180 from current levels. There is absolutely no case to bottom fish Elon Musk now. On the contrary, Tesla is a short on any and every uptick.
I cannot justify Amazon’s stratospheric valuation multiple at a time when the Fed Funds rate could well increase by 200 basis points in the next two years. Yet valuation aside, political risk is now a sword of Damocles for Amazon. Higher sales taxes, punitive anti-trust investigations and regulator wrath over its threat to retailers mean the headline risk will only rise in 2018.
Amazon is the Standard Oil of our generation, just as Jeff Bezos is its John D. Rockefeller. So a populist President has much to gain from going after Amazon, as Ted Roosevelt did with the trustbusters. Something is very wrong in a world where Amazon shares lost $50 billion in a single Nasdaq trading session after Axios reported Trump wanted to “go after” the E-commerce colossus. My advice? Stay away!