Tech companies have experienced a massive surge in value as share prices hit record highs in 2020 – only to fuel severe stock market falls in the past week.
Throughout the year, and in response to the coronavirus pandemic, investors have been buying up shares in the world’s leading technology companies. The Big Five (Amazon, Apple, Alphabet, Facebook, and Microsoft) have seen major gains, with Apple achieving a $2tn market value at the start of September, making it worth more than the combined market value of the entire FTSE 100 index of the UK’s biggest publicly listed companies.
But other tech companies have followed suit: Zoom shares hit a record high on 31st August 2020 after its revenue rose 355% year-on-year and its paying customers increasing by 458% compared to the same quarter the previous year. Likewise, hardware manufacturers like Nvidia have also seen positive gains for the majority of the year.
However, the stock market surge is beginning to lose steam as an on-going sell-off sees losses hit tech.
‘FAATMAN’ Group of Tech Stocks Lose $1tn in Valuation
Taking just the biggest seven tech companies – Facebook, Amazon, Apple, Tesla, Microsoft, Alphabet and Netflix – a staggering $1tn has been lost in market value over the past week. As investors returned after the Labour Day holiday in the US, a mass sell-off of tech stocks that started at the beginning of the month picked up pace.
On Wednesday, the tech-heavy Nasdaq Composite entered correction territory after Tesla lost more than a fifth of its value in a single day – an eyewatering $82bn. Apple, Microsoft and Japanese tech company SoftBank also fell 6.7%, 5.4% and 5% respectively.
According to the FT, “Two thirds of the stocks in the Nasdaq Composite lost ground as investors raised concerns about the valuations of technology companies, which had soared despite the economic fallout from the coronavirus pandemic.”
Ripples of the sell-off were also felt across the Atlantic, with the Stoxx Europe 600 lost 1.2%.
The global share sell-off is a sign that investors are prioritising profits as tensions surrounding ongoing US-China relations, Brexit negotiations and a resurgence of coronavirus cases continue to mount.
We’ve seen these incredible run-ups. People are starting to question [the tech comapnies’] valuation.”
Chief Market Strategist, TD Ameritrade
Why Are Investors Selling Tech Stock Now?
During the height of the coronavirus pandemic, investors pumped their money into only a handful of sectors as they eyed up new opportunities. But by and large, as companies worldwide shifted to operating remotely, the biggest beneficiary of this surge in investment was the technology sector.
One explanation for why investors are selling tech stock now is that, with tensions and uncertainty increasing, investors want to reap the rewards before a major downturn. They believe that this is as good as it is going to get right now, and want to shore up funds before anything bad happens as winter approaches in the Northern hemisphere and the possibility of further lockdowns around the world increases.
Another reason being discussed is that the ongoing rally in the stock market was not typical, mainly because the rest of the economy suffered heavy losses as the tech sector soared. While other sectors ceased operations during the height of the pandemic – and bore the brunt of the economic fallout in the process – the tech sector became indispensable. But as successful as the tech sector has been during the pandemic, it does not and cannot operate in isolation. The extreme valuations we have seen recently do not reflect the actual status of leading tech companies, and a market correction was seen by some as inevitable.
Speaking to The New York Times, JJ Kinahan, Chief Market Strategist at TD Ameritrade, said, “We’ve seen these incredible run-ups. People are starting to question [the tech companies’] valuation.”
Nevertheless, so far, the sell-off is limited to the tech sector – which is good news for the market, the world economy, and the tech companies themselves. Despite the negative headlines, tech companies continue to attract new business as organisations invest in new solutions to stay operational. The sell-off may prove short-lived…