Could the US tech selloff finally bring stock valuations back down to earth?

What’s it really worth?
What’s it really worth?
Image: Reuters/Stephen Lam
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The data privacy scandal engulfing Facebook might have finally burst the bubble in what was one of the most expensive markets. US tech stocks had their worst day in years yesterday as investors concluded that the likelihood of more regulation for social media platforms and other tech companies would make them less valuable.

The NYSE’s FANG+ index, which includes Facebook, Apple, Amazon, Netflix Google, Tesla, Twitter, Alibaba, Baidu, and Nvidia, fell 5.6% yesterday—its biggest one-day drop since at least September 2014, Bloomberg noted. Twitter fared the worst, plummeting 12%. Facebook’s share price fell just under 5%.

On Wednesday, Asian and European stock markets picked up the losses. Both Japan’s Nikkei 225 index and South Korea’s main index dropped 1.3%, while most European stocks are currently in the red for the day. The Euro Stoxx 600 technology index was down about 1.5%.

Facebook, Amazon, Netflix, and Google have lost more than $260 billion in market value in the past week and half, since Facebook’s Cambridge Analytica scandal broke, according to the Wall Street Journal.

But the issues with Facebook aren’t the only thing infecting what used to be the market’s best loved stocks. Twitter has been targeted by short sellers, while Nvidia, which supplies autonomous driving technology, has suspended tests on public roads after the fatal Uber crash, and Tesla was downgraded by Moody’s.

This could be a turning point for the sector that had, in 2017,  propelled the large-cap US stock markets to their best year since 2013.

In mid-March, the price-to-earnings ratio of FANG stocks was 65, meaning they were valued almost three times as richly as the S&P 500, according to Bloomberg. That’s comparable with tech stocks in March 2000, right before the dot-com bubble burst. In general, tech stocks have much higher valuations than the rest of the market, which can be seen in the difference between the P/E ratio of the Nasdaq composite index and broader S&P 500.

Analysts at JPMorgan said that after years of outperforming the global benchmark, the tech sector now looks expensive on numerous metrics in both the US and Asia. “Given the years of outperformance and demanding valuations, we believe that investors should lock the profits in Technology sector,” they wrote in a note to clients earlier this week.

The vulnerability of such heady valuations hasn’t changed everyone’s minds. Most analysts think now could be a good time to buy Facebook shares, while they are getting cheaper, because the company’s dominance in personal data will be hard for other companies to match. Some 90% of brokers who cover the stock have a “buy” rating on the company, according to FactSet. Other big names in tech, such as Twitter and Netflix, are viewed much less favorably.