WALL STREET SOURS ON SIL­I­CON VAL­LEY, BAT­TER­ING TECH STOCKS

Apple Magazine - - Summary -

In­vestors for years have seem­ingly adored tech­nol­ogy stocks as much as most peo­ple love their smart­phones.

But Wall Street has sud­denly soured on Sil­i­con Val­ley and the rest of tech, trig­ger­ing a stom­achchurn­ing down­turn in a tur­bu­lent Oc­to­ber.

Some of the hard­est hit stocks be­long to five com­pa­nies — Face­book, Ap­ple, Ama­zon, Net­flix and Google. They have col­lec­tively at­tracted bil­lions to their prod­ucts, carv­ing out lu­cra­tive mar­kets they each dom­i­nate in an in­creas­ingly dig­i­tal world. In­vestors latched on to their suc­cess and gave them their own acro­nym, “FAANG.” (It’s still in use even though Google now trades un­der the stock of its par­ent Al­pha­bet Inc.)

What a dif­fer­ence a month makes. Since the end of Septem­ber, in­di­vid­ual FAANG stocks have plunged be­tween 4 per­cent and 20 per­cent, col­lec­tively wip­ing out nearly $400 bil­lion in pa­per share­holder wealth.

The down­turn may seem puz­zling, given that Ap­ple’s iPhone sales are boom­ing, the on­line shop­ping traf­fic keeps send­ing more con­sumers to Ama­zon, peo­ple are con­stantly ask­ing Google to en­lighten and di­rect them, peo­ple keep post­ing on Face­book and Net­flix has never been a more pop­u­lar en­ter­tain­ment des­ti­na­tion.

But these com­pa­nies are fac­ing ris­ing chal­lenges. Pres­i­dent Don­ald Trump has es­ca­lated a trade war with China, for in­stance, and gov­ern­ments are start­ing to con­sider tougher reg­u­la­tion that could curb tech’s in­flu­ence. Em­ploy­ees at some large tech con­cerns are in­creas­ingly restive about their com­pa­nies’ con­tri­bu­tions to mil­i­tary and im­mi­gra­tion-re­lated projects.

Much of that con­trib­utes to con­cerns that the tech com­pa­nies won’t be grow­ing as much and as quickly as in­vestors had ex­pected. “We are start­ing to see ‘fork-in-the-road’ sit­u­a­tion for tech­nol­ogy,” said Wed­bush Se­cu­ri­ties an­a­lysts Daniel Ives.

In­vestors cur­rently are bet­ting it will be a bumpy road. The tech-driven Nas­daq in­dex is 12 per­cent be­low the high it reached in Au­gust.

The big-name tech stocks have been far­ing so well for so long that in­vestors have been bet­ting on even big­ger things to come from the com­pa­nies. Those wa­gers might take longer to pay off, or worse, fiz­zle com­pletely if a slow­ing econ­omy or a re­ces­sion un­der­mines their fu­ture growth.

Face­book and Google, for in­stance, might not be able to en­tice as many new users to their free dig­i­tal ser­vices, and the ad­ver­tis­ing that gen­er­ates most of their rev­enue might shrivel away.

For Ama­zon, it might mean con­sumers cur­tail their spend­ing on mer­chan­dise in its e-com­merce site or de­cide they re­ally don’t need an in­ter­net­con­nected speaker like the Echo af­ter all. Net­flix might have more dif­fi­culty at­tract­ing sub­scribers, and could even start see­ing more can­cel­la­tions if house­holds feel squeezed.

Ris­ing in­ter­est rates are also weigh­ing on stock prices, an­a­lysts say. Higher rates re­duce the present value of fu­ture cor­po­rate earn­ings, which in turn un­der­mines the jus­ti­fi­ca­tion for the lofty val­u­a­tions — and high share prices — of tech com­pa­nies.

These val­u­a­tions are com­monly mea­sured by price-to-earn­ings ra­tios — the amount in­vestors are will­ing to pay for each dol­lar of an­tic­i­pated earn­ings. Con­sider Net­flix, a com­pany that be­gan rent­ing DVDs through the mail dur­ing the late 1990s, and which not long ago was con­sid­ered to be worth more than Walt Dis­ney Co. and its Magic King­dom.

Even af­ter the re­cent sell-off, Net­flix’s priceto-earn­ings ra­tio stands at $107 for ev­ery $1 in earn­ings. By com­par­i­son, Dis­ney’s is a more rea­son­able $14 for ev­ery $1 in earn­ings — and it’s also now worth about $37 bil­lion more than Net­flix.

The long tech rally boosted two mem­bers of the FAANG club — Ap­ple and Ama­zon — to tril­lion­dol­lar market val­u­a­tions, mak­ing them the first U.S. com­pa­nies to reach that mile­stone.

But Ama­zon’s market value now stands be­low $800 bil­lion. Ap­ple could also be knocked out of the $1 tril­lion club if its earn­ings for the lat­est quar­ter dis­ap­point in­vestors the same way Ama­zon and Al­pha­bet re­ports did this past week.

“There are a lot of white knuck­les out there right now, so all eyes are on Ap­ple to emerge as the knight in shin­ing ar­mor,” Ives said.

Ap­ple’s re­port for its fis­cal fourth quar­ter is sched­uled to be re­leased Nov. 1. An­a­lysts ex­pect Ap­ple to have earned $13.5 bil­lion for the Jul­y­Septem­ber quar­ter, or about $6 mil­lion ev­ery hour.

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