Why are US tech stocks falling on the stock market?

Storm warning on the Nasdaq, the American stock market comprising the 100 major technology stocks in the country. The stock market index fell from 16,765 points at its highest on December 28, 2021 to 11,200 points on June 16, 2022, before rising to 13,311 points on August 4. A veritable roller coaster that has particularly affected certain companies such as Meta, the parent company of Facebook. The company lost 55% of its value, going from $378 per share on September 10, 2021 to $170 on August 4. Ditto for Netflix, which has dropped by 66% in 9 months, its share price going from 690 dollars on October 21, 2021 to 229 dollars on August 4. But the biggest drop is attributed to the video conferencing platform Zoom, which fell from $383 on August 6, 2021 to $112 on August 4, which represents a 70% drop in its value in 1 year. Vertiginous haircut.

Many technology stocks have therefore been in distress since the resumption of post-covid economic activity and Valentin Nicaud, member of the expert information unit at the broker Bourse direct, explains the underside of this stock market berezina.

Challenges: How do you explain the big drop in stock prices for these tech companies from their 2021 highs?

Valentin Nicaud: There is a set of circumstances, first the increase in key rates. This is not positive for equity markets in general and it is even less so for tech companies which are often very indebted because they are young and do a lot of research and development. When the key rates go up, the cost of debt also increases, so this reduces the cash flow future [les perspectives de revenus futurs ndlr]. However, American technology stocks are expensive on the stock market, because they have very good prospects for future income, so as soon as they disappoint a little, these so-called growth stocks are sanctioned.

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The second point that explains the decline in technology stocks is the development of a competitive universe, particularly for certain companies. Meta, for example, had not anticipated the arrival and success of TikTok, which threatens to take market share from Facebook.

Finally, these technology companies had risen a lot during the peak of Covid and the periods of confinement, because the number of users of digital services increased sharply during this period. So they may have become a little too expensive for investors. Now, I don’t think you can say that it was a bubble that burst that won’t come back again at such high prices as during Covid.

What stocks or investments have taken refuge in investors who have fled technology stocks?

Due to the fear of inflation and the rise in interest rates, we have experienced in recent months one of the biggest corrections since the 2000s on the Nasdaq. Investors have therefore taken refuge in defensive stocks which are by definition more stable. Among these values, we count the energy sector, which rose well because it benefited from the inflation on the costs of raw materials, we also count the sector of banking companies and mass distribution before we realized that inflation was threatening their margins.

Investors retreated to less risky investments, but managers also kept a “cash” pocket important to be able to make purchases on files which seem to them to have fallen abnormally.

“I don’t see the business models of Facebook, Netflix, Google or Amazon threatened”

The latest results from some technology companies have disappointed the market, do they reveal real problems in the business models of these companies?

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The problem with the markets is that they are essentially based on earnings expectations, but as technology companies are very well valued, investors are expecting very good results. So yes Facebook and Netflix disappointed the markets. In addition, Facebook had promised progress in its metaverse project but it did not keep them so it was sanctioned.

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On the other hand, I do not see the economic models of Facebook, Netflix and even less those of Google and Amazon threatened, but as long as there are uncertainties about the competition and the prosperity of these companies, investors will remain cautious.

What is your outlook for the coming months for technology stocks?

These companies have returned to price levels that are often lower than their pre-Covid levels, except that these companies have increased their revenues, so they are supposed to be worth more. Moreover, some analysts are already anticipating rate cuts and are talking about returning to growth stocks such as technology stocks. So we could still experience a 5% correction, but 10% or more, I don’t think.

That said, we will have to wait for the peak of inflation and a real prospect of a rate cut to see investors return to technology stocks. From September already, many managers will take a look at these companies and see if we are at low points and if it is time to buy. But there will still be the question of competition and growth prospects for Meta, Netflix or Zoom.

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