Tech stocks under pressure despite sterling results
Tech stocks are expected to remain under pressure over the short term, with high valuations and earnings growth expectations a drag on the sector, despite companies still delivering sterling results.
According to the latest Bank of America Merrill Lynch survey, US fund managers have their lowest allocation to technology stocks in two years. The market darlings are all feeling the heat to some degree.
Facebook closed flat on Wednesday, despite reporting earnings that beat forecasts, with revenue jumping 49%. Apple closed higher on Wednesday, the first time in five sessions, illustrating the pressure under which tech stocks are trading.
Fang stocks Facebook, Amazon, Netflix and Alphabet lost a massive $86bn in value on Tuesday, close to 10% of the present market value of the whole JSE.
Naspers, with a market cap of just under R1.3-trillion, or $108bn, opened weaker on Thursday and is 15% down so far in 2018. It ended the day marginally up, struggling to break above R3,000 a share.
Analysts say investors could be taking on extra risk with tech stocks, which are “priced for perfection”.
So, if they deliver 10% growth, which is objectively very good, and the market expected 15%, the share price would have to adjust for that, says Schroders analyst Juan Torres Rodriguez.
He said Facebook had no margin of safety built into its share price, which is very high. Facebook has lost 6% so far in 2018, while Apple is down 2%.
Tom Ellkiott, deVere group analyst, says there is a sense in the market that tech stocks are facing problems on a wide front. These include greater regulation in privacy issues, lacklustre sales and “a perceived political vendetta by the administration of President Donald Trump, particularly towards Amazon”.
However, Elliott says that he does not believe the recent selloff is the beginning of a bear market.
Locally, market heavyweight Naspers has dragged down the all share index because of its huge weighting in the index. After rocketing 71.34% in 2017, Naspers has lost 14.6% in 2018.
IG SA analyst Shaun Murison says now is an opportune time to look at Naspers again, with Walmart aiming to buy a majority stake in Flipkart, the largest e-commerce business in India. Naspers owns roughly 17% of Flipkart and is the thirdlargest shareholder of the company behind SoftBank and Tiger Global.
“The weaker rand is expected to bring some benefits to rand hedges, including Naspers,” he says.
The firmer trend in the rand since mid-November 2017, with the currency reaching R11.5069/$ at the end February, has held Naspers back at a time when market enthusiasm for Tencent has abated somewhat.
Naspers owns 31.2% of the Chinese internet company, which must also continue to deliver strong earnings growth of about 50% to justify its market valuation.
Some analysts are sticking to their medium-term target of R5,000 for Naspers, but others are sceptical with Tencent remaining the main driver of Naspers’s gains.
Management has promised to diversify the earnings stream, but with little success so far.
For now, the Tencent discount of about 34% makes Naspers an attractive investment, more so as investors receive the group’s other investments for free. At last count, these amounted to about $20bn.
Stanlib retail investment director Paul Hansen says research has shown that highly valued stocks often experience a “melt-up” as they are rerated, as opposed to the traditional “melt-down” in a bear market.
“A melt-up could last for up to two years and may benefit Naspers,” he says.