Apple stock fell on Wednesday as markets digested the Georgia runoff results.
Steffi Loos/Getty ImagesThe air is coming out of the tech stock valuation bubble.
The morning after the Georgia Senate runoff, the broader market is higher—but many tech shares are taking it on the chin. The market is betting that Democratic Party will gain control of the U.S. Senate, though one of the races remains too close to call. While the S&P 500 was up 1.2% in recent trading, and the Dow Jones Industrial Average climbed 1.7%, the tech-heavy Nasdaq Composite is up just 0.4%.
On Wednesday morning, the five largest U.S. tech companies— Apple (ticker: AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), and Facebook (FB)—are all down, underperforming the broader market.
In part, the decline reflects concerns that Democratic control of both the House and the Senate will make it easier for lawmakers to impose new regulations on data privacy, tougher rules for mergers and acquisitions, and other measures that wouldn’t be welcome by tech companies.
“To be blunt, it’s a clear negative for Big Tech,” Wedbush analyst Dan Ives writes in a research note. He says one impact of Tuesday’s election will be more scrutiny of tech business models, which adds risk to the sector. “We would expect much more scrutiny and sharper teeth around [big tech] names with potential (although still a low risk) legislative changes to current antitrust laws now on the table.”
Still, he remains bullish on tech stocks for this year, with a caveat: “The Senate turning blue could tame the tech rally until the Street gets a better sense of the legislative agenda under [President-elect Joe] Biden heading into the rest of 2021/2022.”
The election may have served as a catalyst for slowing tech’s rise, but there are additional factors at work.
Ted Mortonson, technology desk sector strategist at Baird, says there is a sector rotation unfolding, driven in part by rising interest rates. He notes that the 10-year Treasury yield has moved above the 1% level from a low of 31 basis points in March. There was “massive multiple expansion” in tech stocks in 2020, as earnings rose, in part, from lower travel and entertainment expenses, Mortonson notes. As the yield on the 10-year breaks over 1%, he says, multiples “have to come the other way.”
Mortonson told Barron’s he is seeing clients switch from a fear of missing out on the tech rally to “fear of getting killed.” He notes that postelection, investors are rotating into financial services, industrials, consumer plays, materials companies, green tech, and health care—everything except energy.
Still, there are still strong underlying tech trends, like digital transformation, 5G, and the emergence of electric vehicles, he adds. But with some tech stocks trading at 20 to 36 times enterprise value to 2022 revenue estimates, “a lot of people are uncomfortable with that level of expectation,” he says. “It’s all about multiple contraction.”
In the cloud computing segment, where prices and valuations soared in 2020, most stocks are lower, with losses of 1% or more for companies like Salesforce.com (CRM), Fastly (FSLY), Twilio (TWLO), Zoom Video Communications (ZM), Zscaler (ZS), C3.ai (AI), and Asana (ASAN.) But semiconductor stocks—which benefit from increased industrial activity, and which have been trading at more reasonable multiples than software stocks—are mostly in the green.
Write to Eric J. Savitz at eric.savitz@barrons.com
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January 07, 2021 at 12:17AM
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Facebook, Amazon, Microsoft Stock Fall on Georgia Election Results - Barron's
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