As some of the most high-flying technology stocks continue their dramatic declines, one Wall Street analyst calls it a "reality check" for investors
It’s a bloodbath.
Technology stocks continued their stomach-churning free fall Wednesday, wiping out billions of dollars in shareholder value as investors shunned one-time market darlings.
The selloff affected old-school Internet stalwarts like AOL as well as newly public firms such as Twitter, reflecting investors’ growing disillusionment with so-called growth companies particularly in the Internet sector.
After a remarkable five-year run in which the tech-heavy Nasdaq index rebounded from the depths of the Great Recession to soar 135%, fueling high-flying IPOs from the likes of Facebook, Groupon and Zynga, many tech investors have hit pause.
“We’ve seen dramatic declines, and for some of these names it’s reasonable to call what’s happened a crash,” says Scott Kessler, Head of Technology Sector Equity Research at S&P Capital IQ. “It’s painful for investors, but the market had a banner year last year, the fourth year of a bull market, so it makes sense for there to be a pullback.”
Twitter, which tumbled 18% Tuesday as early investors were allowed to sell shares for the first time, continued its plunge, declining nearly 4% on Wednesday. Twitter, which went public last November, has shed more than 50% of its value since the beginning of the year.
“This is a reality check where people are saying we’re in a speculative bubble around a few discrete stocks that is bursting or should burst,” says Kessler. “For some of these companies, the valuations are becoming harder to rationalize or even understand.”
Yahoo, the purple-hued Internet pioneer, declined by an ominous 6.66% on Wednesday, and is down nearly 8% so far this year. Online video game company Zynga fell 4% on Wednesday. Facebook was down 2%, Amazon was off by 1.57%, and the list goes on.
Kessler points out that the meltdown is affecting specific slices of the technology market, particularly “high-multiple, high-visibility” Internet and social media companies. “The key consideration is how folks are defining technology,” he says. The tech-heavy Nasdaq index, bolstered by still-thriving companies like Apple (up more than 7% this year), is only down 1.5% in 2014, which belies the dramatic declines experienced by several high-profile Internet names.
The sense of gloom and doom among Internet stocks could put a damper on the IPO market, which was booming earlier this year. U.S. technology IPOs increased by 100% in deal volume in the first quarter of 2014 compared to one year earlier, with 12 deals comprising $1.6 billion, according to a new study from consulting giant PwC.
“King Digital came public and the stock didn’t do well, so people are starting to wonder if too many companies are coming public too quickly at too high valuations,” says Kessler.
A cooling IPO market could put the brakes on two of the most anticipated IPOs of the year, cloud computing upstart Box and digital payments company Square, led by Twitter co-founder Jack Dorsey. But Kessler doesn’t think the tech weakness will affect the Big Kahuna IPO of the year, Alibaba, which just announced plans to go public, “unless market conditions continue to deteriorate materially.”
It’s difficult to predict how long the selloff will continue, and investors would be wise to avoid trying to time the bottom of the market, which is a perilous game. But one thing seems certain: The sky-high valuations enjoyed by many tech stocks over the last few years may not return for some time.
“It’s somewhat reminiscent of what we saw 15 years ago,” says Kessler. “A lot of these consumer stocks are household names and are constantly talked about by investment and media types, so there’s a tremendous amount of attention on them. But I repeatedly tell people that just because these companies are impressive and interesting does not mean they’re safe and sound investments.”