FANG stocks lose some of their bite amid sell-off in technology sector
It’s become a lot less easy to make money in tech stocks.
A confluence of negative news has rocked the shares of the nation’s leading technology companies in recent days, though many of them bounced back Thursday. Developments at companies from such as Amazon and Tesla have prompted investors to take a hard, fresh look at the firms’ growth prospects and the stocks’ lofty prices.
Facebook Inc. was hit with a data-privacy scandal. Amazon.com Inc. came under attack again by President Trump over its sales taxes and U.S. Postal Service contract. Concern mounted about Tesla Inc.’s cash needs. The self-driving vehicle industry was roiled by a pedestrian fatality in Arizona caused by an autonomous Uber car.
Because the tech giants’ stocks — and the stocks’ enormous price gains in the last two years — have attracted an increasingly larger following, their abrupt declines helped bring down the overall stock market in March.
For instance, the NYSE FANG+ index plunged nearly 8% this week before finishing nearly unchanged Thursday. The index tracks the so-called FANG stocks — Facebook, Amazon, Netflix Inc. and Google parent Alphabet Inc. — and six others, including Tesla and Twitter Inc.
The broader, tech-heavy Nasdaq composite index, which soared 28% last year and gained an additional 5.4% in the first two months of this year, fell 2.9% in March, its worst monthly showing since January 2016.
“The gains were easy the last few years” with the big tech shares, said Jason Ware, chief investment officer at Albion Financial Group. “Investors haven’t been challenged much with these stocks. Now, there’s been news that questions their assumptions.
“Investors are now saying, ‘Maybe the stock isn’t worth as much as we thought,’“ he said.
But as Wall Street heads into a three-day break — the market is closed for Good Friday — the question is whether investors used the bad news simply to take some of their big profits or whether the developments point to trends that could curb the companies’ longer-term business prospects, thus making current stock prices overvalued.
Consider: Even after the tech sector’s dreary week, Amazon’s stock is still up 66% over the last 12 months, compared with a 12% gain in the benchmark Standard & Poor’s 500 index. Netflix has doubled in price and Twitter has surged 93% in the period.
The gains mainly reflect investors’ expectations that the firms enjoy dominance in their various spheres and will continue their heady growth in the years to come.
With gains like those, the negative news gave many investors an apt reason to cash out. And some of those investors were momentum players with little interest in the long-term business outlooks for the companies, Ware said.
“These folks are not fundamentally rooted in their analysis,” Ware said. “They’re just renting the stock when there’s momentum. And when that momentum starts to turn, these folks will flee and take their profits.”
For those investors looking at the tech giants for the long term, “one of the questions we’re getting is whether the recent declines in these stocks is indicative of something more sinister in the market,” said Adam Phillips, director of portfolio strategy at EP Wealth Advisors in Torrance.
“We don’t subscribe to that” thinking and, in fact, see the stocks’ recent pullback as “making them more attractive,” Phillips said.
One example for Phillips is Amazon. A good many traders seemed to agree Thursday, as Amazon recovered from early losses — and a 4.4% drop the prior day — and finished with a gain of 1%.
Facebook jumped 4.4% on Thursday but was still down 17% from Feb. 1. Netflix and Alphabet both rose 3%. Apple Inc., which is one of the 30 stocks in the Dow Jones industrial average, rose nearly 1%.
“A lot of [the selling] was profit-taking but also an acknowledgment that these stocks, which have trended higher for quite some time, have come under a different scrutiny and are getting the wrong kind of attention,” Phillips said.
Facebook provides a good example of the challenge longer-term investors now face.
Owing to the scandal involving Cambridge Analytica, which gathered data from about 50 million Facebook users without their permission, Facebook is being investigated by the Federal Trade Commission and could be the focus of regulatory reform by Congress.
One argument for investors is that “the Cambridge fiasco represents a seminal negative moment that will change the future business model and growth trajectory of Facebook,” Daniel Ives, head of technology research at GBH Insights, said in a recent note to clients.
But Ives said “we ultimately believe Facebook will emerge from this crisis with minimal regulatory changes and limited financial damage to its user base and advertising kingdom,” even if this represents “the darkest chapter for Facebook and [CEO Mark] Zuckerberg in its 14-year history.”