The tech sell-off was renewed this morning during the premarket trading hours, as Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), Alphabet Inc (NASDAQ:GOOGL) and other favorites plunged in a reversal of the glimmer of light that touched the sector on Tuesday. Most analysts have been trying to calm investor fears, but the Street just isn’t buying it. A key question now is just how long the data scandal involving FB and President Trump’s battle with AMZN will continue to affect them and the rest of the sector by ratcheting up regulatory concerns.
But is the tech sector really the market’s big problem right now? One firm argues that value stocks are actually the market’s big enemy right now.
Regulation jitters trigger tech sell-off
At the core of the tech sell-off are the problems experienced by FB and AMZN. GBH Insights analyst Daniel Ives noted this week that their issues are entirely different, but both of them could have wide-reaching impacts across the tech sector. The data scandal involving Cambridge Analytica finally called consumers’ attention to the volumes of data that FB and other tech giants have on them. In a note on the tech sell-off recently, Canaccord Genuity analyst Michael Graham questioned whether the tech sell-off sweeping through the Internet sector is “the beginning of a data revolt or a short-term blip.”
He warned that the scandal could result in FB, GOOGL, TWTR, SNAP and even AMZN having access to a lot less data than they currently do, which would limit their ad targeting capabilities, thus potentially impacting ad prices. However, he sees very little real risk for the companies with “reasonable valuations,” which might exclude GOOGL in his view, given that he has a Hold rating on it.
Ejecting fundamentals from FAANG
The tech sell-off has brought the famed FAANG group to its knees, and one interesting comment we’re seeing in more and more analyst notes about the group and especially about FB and AMZN focuses on fundamentals. For example, Ives said in a note this week that the tech sell-off, specifically for the FANG names, demonstrates how fundamentals have “taken a backseat to the ‘regulatory albatross.'” However, some would argue that fundamentals had been thrown out the door already as FB and a few other names, especially NFLX, soared higher and higher as multiples expanded, seemingly without end.
Graham said that although he continues to like the fundamentals at NFLX, it was “getting harder to see a ton of near-term upside for the stock after the very strong performance recently.” Stifel analysts downgraded NFLX last month due to its soaring valuation. AAPL picked up a rare downgrade of its own in January as analysts began to consider how high is too high for the most popular names in tech.
Tech versus value stocks
In another sign that fundamentals haven’t really been the market’s focus for a while, Macquarie analysts Viktor Shvets and Perry Yeung examined their firm’s portfolios to assess the impact of the tech sell-off. Interestingly, they found that the tech plunge wasn’t the real problem. Instead, they discovered that what caused the majority of the decline in their portfolios was the outperformance of value stocks.
They explained that their portfolios “are designed for a dystopian era of non-mean reversion rather than tech per se.” They also added that whenever “significant losses” were observed, the market was dominated by “a perception that conventional business and capital cycles are returning.” In other words, when the markets perceive fundamentals and value as becoming more important than momentum and growth, their firm’s portfolios take a hit, and Macquarie certainly isn’t the only firm that’s been tapping into the tremendous momentum that’s been sweeping the market for so long.