TIME stock market

Why Silicon Valley Is Getting Hammered by the Global Selloff

An investor stands in front of electronic board showing stock information at brokerage house in Shanghai
Aly Song—Reuters An investor stands in front of an electronic board showing stock information at a brokerage house in Shanghai on Aug. 24, 2015

Aging bull or emerging bear? Investors see larger problems ahead for big tech

Last week was a relatively quiet one for tech news. So why, in a week when the S&P 500 suffered its biggest decline in 18 months, were technology stocks being hammered especially hard?

The question takes on a new relevance as US markets brace for new declines. The real culprits behind Wall Street’s turmoil last week—primarily, tumbling Asian stocks and slumping commodity markets—only became worse over the weekend. Should tech investors brace for even worse declines ahead? The near-term answer seems to be that they should.

During the past five trading days, the S&P 500 index fell 5.7%. Overall, technology shares were hurt by the selloff even more, with the NASDAQ Composite Index—more heavily weighted with mid-sized and large-cap tech companies—down 6.7%.

The biggest names in tech suffered even worse declines than the NASDAQ. Microsoft fell 8.4%. Apple and Facebook both fell by 8.8% Yahoo fell by 9%. Twitter, already having one of its worst months in the stock market, fell 11%. Google was one of the few large-cap tech shares to fare better than the NASDAQ, but it still declined 6.6% last week.

None of these companies announced any grim development that could have triggered a selloff last week. Instead, they are caught up in a downdraft of selling that was triggered by events well beyond Silicon Valley—continued collapse of the Chinese stock market, the prolonged slump in global commodity prices, and the erosion of currency valuations against the dollar in emerging markets.

These days, the most successful tech companies are global enterprises, so it’s not surprising that they would be affected somewhat by turmoil overseas. After all, these external factors have been haunting tech companies for months. Weaker currencies abroad, for example, are tied to a strong dollar, which can erode overseas revenues of multinationals.

But even so, big tech had been seen as a safe haven amid the global turmoil. Yes, Apple has exposure to China, but Facebook and Netflix don’t. And besides, Apple and Microsoft offer the kinds of dividends investors seek out in uncertain times. And nearly all of them were promising years of growth from the business models they helped pioneer.

Hence the vexing question: Why would they be sold off more harshly than other sectors where multinationals dominate? Some of the easy answers aren’t satisfactory. Yes, trading is seasonally light in August, but these are some of the most actively traded stocks. Yes, some like Netflix are overvalued, but Apple and Microsoft have P/E’s of 12 and 16, respectively—below the S&P 500’s ratio of 20. So why has Apple officially entered bear territory?

There is another explanation, having more to do with what may be a shift in the mindset of investors who grew accustomed to expecting high-growth from tech companies. Currency crises and panics in large overseas markets may not have anything directly to do with whether Americans will buy more smartphones, but they can signal big shifts in financial cycles.

Nobody is sure yet whether what happened last week was a correction or the beginning of a new bear market. Corrections are unpleasant but usually temporary—and they are often necessary before promising stocks can advance higher. But a bear market, which the US stock market hasn’t seen in six years, would slow down revenue growth and potentially even the profits.

And that’s what’s most likely worrying investors. This is an old bull market, ready to be put out to pasture. And the overseas turmoil may be, if you’ll allow the mixing of metaphors, the straw that breaks the aging bull’s back.

In other words, the tech selloff last week may reflect a growing sense of nervousness among large fund managers that have been buying not just publicly traded shares like Apple and Google, but investing in private rounds of newer companies like Uber and Airbnb with an aggression never seen before in previous tech bull markets.

These private tech companies–called unicorns because a billion-dollar valuation for a private startup was once unheard of (although now there are 131 of them)–don’t have financial data available to public scrutiny. It’s hard to know which of them are even close to making a profit. Or, more crucially, whether they have enough cash to carry them to profitability should the economy slow down in the future.

Individual investors have been largely shut out of investing in these companies, but institutional investors like mutual or private-equity funds have bought into them on a scale that wasn’t even dreamed of during the dot-com boom. And after last week, those fund managers may be wondering if they overextended themselves in the tech sector by gorging on these private rounds.

If the selloff is more than a correction—that is, if it’s a true bear market—many funds could be left having to write down losses from these private investments when their valuations drop. And unlike stocks in the public market, privately held shares are much harder to sell because they are illiquid. Some funds may already be selling their public tech shares at a profit as a hedge against this risk.

A few venture capitalists have been warning about this danger for a while. Bill Gurley of Benchmark, a veteran of the dot-com crash, has been sounding for a while like the VC version of Cole Sear, saying he sees dead unicorns this year. Last week, noting the drop in tech stocks, he warned again that investors would soon shift their focus from revenue growth to profitability. Others joined him in predicting zombie unicorns.

These warnings are coming from VCs who, unlike the rest of us, are in a position to see the financial health of many private tech companies. The day may come when the small investors who were barred from buying shares in these so-called unicorns are glad they never had the chance. In the meantime, the mere prospect of dying unicorns seems to be scaring fund managers. Scaring them even more than what’s happening in China.

TIME Apple

What Apple’s Bizarre Stock Tumble Really Means

Investors are starting to worry about one part of the business in particular

The reigning king of tech stocks took a bad stumble Tuesday. Apple reported financial earnings that, on the face of things, met or exceeded Wall Street’s expectations. Yet there were also signs that sales of its largest product, the iPhone, may be slowing faster than most investors have expected.

And lo, $50 billion in Apple’s market value vanished in a matter of minutes. What happened?

Apple has been branching into other areas like streaming music and the Apple Watch, in addition to its Mac computers and iPad tablets. But these days, the company might as well be called the iPhone company. Smartphones make up to 69% of Apple’s total revenue.

Apple isn’t having trouble selling iPhones. The issue is whether it can keep selling them after the initial surge of demand that follows a new release. Apple says it sold 47.5 million iPhones last quarter. The consensus among analysts had been closer to 49 million, with some of the more bullish analysts arguing that Apple would surprise us with as many as 52 million iPhones sold last quarter.

That didn’t happen. Apple shares fell nearly 8% in a matter of minutes after the numbers were released. This, in spite of the fact that Apple’s revenue rose 33% to $49.6 billion and its net income rose to $1.85 per share, beating Wall Street estimates by four cents a share.

Here’s the thing. The headline numbers on earnings reports often tell only part of the story, especially with a company like Apple that is so obsessively tracked by analysts, investors, fanboys and bloggers. So yes, Apple beat expectations, but it really just kind of squeaked past them, whereas it typically leaps over them with a substantial margin. In other words, beating the numbers isn’t enough. Investors expect Apple to thrash them.

And again, that didn’t happen. But all of this disappointment is centered around the iPhone. The selloff late July 21 wasn’t driven as much by Apple missing a target set by analysts. It came from a much deeper concern about Apple’s ability to keep dazzling–eight years after it introduced the iPhone–with its technology and design.

“We think the iPhone has a lot of legs to it–many, many, many years,” CEO Tim Cook said after an analyst hinted the company was a little too focused on the iPhone. “We’re in the early innings of it, not the late innings.” Fine, except as any baseball fan knows, there can be some ugly things that happen inning by inning, even when you end up winning the game.

This is precisely the concern around the disappointing iPhone sales. It’s not so much that the iPhone will die. It’s that Apple releases a new generation every two years–with a semi-generation (the 4S, 5S, etc) released midway through the cycle. After Apple released the iPhone 5 in 2012, sales surged early before disappointing for quarters, even through the 5S release. Samsung quickly caught up to the speed and features that once set the iPhone 5 apart. And Apple’s stock flagged.

The 8% drop in Apple shares is a hedge against this scenario playing out again. It may end up being a blip in Apple’s steady march toward a trillion-dollar market cap. But for investors focused on the next few quarters, it’s worrisome. Do investors have to wait for the release of an iPhone 7 in the fall of 2016 to ride a wave higher? Or does Apple have something in store to keep it from becoming a cyclical stock?

Of course, it didn’t help that Apple said that revenue this quarter would come in between $49 million and $51 billion, below the consensus estimate of $51.1 billion. Apple pointed out that its iPhone sales rate is three times the industry average. Which is encouraging, but the broader fear among tech investors is that smartphone sales in general are slowing, having reached market penetration in many global markets.

The iPhone has not only been Apple’s biggest product, but also its most consistently reliable. Sales of the iPad declined 18% last quarter, the sixth straight quarter of year-over-year declines. Apple sold an estimated 2 million Apple Watches last quarter, assuming a median sales price of $499, which isn’t bad but also below the projections some saw of 3 million or more.

So Apple may have stumbled but it is still far from falling. Over the long term, it’s proven foolish to bet against the company. Then again Apple’s stock doesn’t rise in a straight line but rather takes detours into valleys. The bullish scenario is this earnings report is Apple has run into a ditch rather than a valley. The bearish scenario is more volatility to the downside before Apple resumes its long-term ascent.

For those focused on the near term, however, there is another concern. The tech earnings season started off on an optimistic note, with Google surprising with strong results. But already this week we’ve seen IBM disappoint (in its ongoing painful transformation into the cloud), and then Microsoft somehow fall short of what investors wanted. And now Apple.

Most of these disappointing earnings have less to do with a fundamental, widespread weakness among tech companies and more with a sense among investors the rally is peaking. It’s getting harder to excite the bulls now that the bull run is entering its seventh year. Apple, like many of its peers, are pushing forward to a brighter future. But their investors are increasingly showing signs of exhaustion.

Read next: Apple’s Hiring More Car Industry Experts For a Secret Project

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TIME Markets

Here’s Why Summer Earnings Season Might Not Be Such a Bummer This Time Around

A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
Lucas Jackson—Reuters

Greece a wreck? Check. China in trouble? Check. But there're reasons to hope

It’s here again. The quarterly financial reality show that Wall Street calls earnings season. And for technology companies, it seems like an especially precarious time to talk to investors about their financial health.

The last earnings season in April was a dicey one for all but a few tech companies. If anything, the overall environment has grown even more uncertain, if not gloomier. And if there is anything that tech giants learned during the April earnings season, it was that storms in the global economy beyond their control are beginning to have a very real—often deleterious—effect on their bottom lines.

Are things as grim as they look? The expectations say so, but these expectations have been weeks in the brewing. Here are five clouds that are sure to hang over the summer season for technology earnings, along with one silver lining that could redeem of the concerns.

Greece is the word. Corporate executives love a scapegoat. Especially during earnings season. And even more so when they know that their reported earnings are likely to disappoint. This summer, there is no scapegoat more primed for sacrifice than Greece. Expect to hear how an imminent default will curtail revenue and profit growth, even and particularly among companies that have little if any business in Greece.

In some cases, this may not be as lame as it sounds. The concern about Greece all along has been what a default and subsequent exit from the Eurozone would mean for larger economies such as Italy and Spain. Beyond that, will growth slow in Europe’s broader economy, a key market for many multinational tech firms? And more immediately, will the US dollar remain strong? Recall that a strong dollar dented the revenue growth of many US tech companies last quarter, notably Facebook.

Tech companies can hedge against currency fluctuations, but this works better when things aren’t as volatile as they are right now. The dollar has remained strong against the Euro and other currencies between April and July. If anything, the recent turmoil in Europe has added to dollar strength that few companies had been expecting.

And the next few months could be just as uncertain, if not as tumultuous – which could lead many tech companies to be cautious when they offer guidance for earnings and the rest of the year. If so, expect a lot of conservative earnings estimates coming from companies as they hedge their forecasts into year that is becoming even cloudier and more unpredictable as it progresses.

A China meltdown. In a global economy where being successful increasingly means being multinational, the exposure to bonfires that are burning 6,000 miles away from Silicon Valley can deliver some blowback onto US companies. The crisis in Europe and the result is one example. Another, perhaps bigger threat emerged in June in a much larger market: China.

Over the past year, a stock bubble has been building on exchanges inside the Chinese mainland. Chinese markets rebounded nearly 7% Thursday after losing more than 30% of their value in the previous month. But what if this is just the proverbial dead-cat bounce? The concern for US tech companies has been what the fallout of the bursting of the Chinese stock bubble means for consumer spending on things like smartphones and online services.

A prime example is Apple. After being written off as an aging tech company, Apple once again revived its growth on the iPhone 6. Much of that growth came from China, where iPhone sales topped those in the US for the first time ever. But what happens when personal discretionary spending dries up in China? Is the iPhone seen as a necessity, or a luxury? We will find out when Apple – still as close as Silicon Valley has two a bellwether for the entire tech industry – reports earnings on July 21.

The fall and fall of the PC. When the iPad emerged five years ago, it precipitated a decline in PC sales. But a year ago, when iPad sales began to plateau themselves, the sales of PCsbegan to stabilize. That gave some hope to companies like Microsoft, Intel, AMD that they had more time to respond to the death of the PC and come up with alternative revenue streams.

In recent weeks, it’s become clear that PC sales are once again slumping, not just in spite of – but in part because of – the release of Windows 10. AMD warned investors this week tobrace for disappointing revenue. Analysts of Intel’s stock are urging its shareholders lower their expectations. Consumers may have written off the PC a few years ago, but this quarter may show that companies that relied on the laptop and desktop for decades continue to bleed out.

Smartphone sales aren’t what they used to be. Hardware manufacturers looking for growth has been focused on smartphones for the past several years. The feature phone of yore quickly became a relic of the aughts, while the functionality of smartphones quickly replicated when PC or laptop could do (see above).

In 2014, smartphone users grew 25% to 1.6 billion users, according to eMarketer. But sales growth is slowing. This year, smartphone users will grow by 16.8%. And IDC expects an even slower growth rate of 11.3%. As a rule, larger market penetration means slower revenue growth. And smartphone makers are finally hitting the diminishing returns of expanding into the largest market on the planet.

The catch for US investors is, even the growth happening now is going to companies that aren’t traded on US exchanges. Xiaomi, which has garnered a $45 billion valuation in private markets, sold 35 million smartphones in the first half of 2015 and plans to sell even more by expanding from China into India and Brazil.

Now look at the older, publicly traded smartphone makers. Samsung Electronics warned this week that its revenue would fall 8%, well below investor expectations. Microsoft laid off 7,800 jobs, largely because of its ill-considered purchase of Nokia and take a $7.6 billion charge against the 2013 acquisition. BlackBerry disappointed again on the back of poor smartphone sales. More phones around the world may not be translating into accelerating profits for US tech companies.

The valuation conundrum. Say what you will about the dot-com boom. Tech stocks then may have been grossly overvalued, but at least they were uniformly overvalued. Today, things aren’t so simple. The S&P 500 has a forward PE ratio of 16.5, while the tech portion of that index has a slightly lower PE of 15.5.

That’s thanks to aging giants like HP, with its forward PE of 8.3, and Intel (13.9) and IBM (10.3). But the flashier names in tech are much more expensive: Facebook is trading at 42.9 times 2015 earnings (while its revenue growth is slowing from above 60% a year to around 35% a year). LinkedIn is at 100 times estimated 2015 earnings, Netflix is at 500 times earnings, and Amazon is at 1,100%. Invest in a tech winner this month and you have to pay a rich premium.

The silver lining. There is, however, a wildcard inside the earnings season. It’s that, as a rule, much of the bad news has been evident for a while. And because investors have seen it coming for a number of weeks, they’ve had a chance to prepare for the worst. This leaves a significant potential for surprise. So you might look at the bearish mood and think things could get better.

So here’s what tech investors can reasonably look forward to opening several weeks. Like last quarter, if a company shows signs weakness, a selloff will likely ensue. But on the other hand, expectations in general are so low that any sign of surprising strength – even in an overvalued stock like Netflix or Amazon – will likely push share prices higher.

In other words, we’re in a stock-picker’s market. You’re either hero or a goat, and you’re only as good as your last quarter. Overall, given the bearish sentiments that the market has going into this tech earnings season, there seems to be room for positive surprises. But if many tech company earnings come in below expectations, there is also no shortage of scapegoats to go around.

TIME stocks

Why China’s Stock Market Meltdown Could Hurt Us All

The negative consequences are already spreading beyond China's borders

The great Chinese stock bubble of 2015 has, as many expected it would, popped. After peaking on June 12, the Shanghai Composite Index has fallen 32% and the more volatile, tech-oriented Shenzhen Composite Index has dropped 40%.

For the first three weeks after those markets peaked, Chinese stocks listed in the relatively stable US exchanges were largely unaffected. Many of them declined a bit, but for the most part investors accepted they were insulated from the margin trading, absurd valuations and speculative trading afflicting stocks in Shanghai and Shenzhen.

That has changed quickly this week. NetEase, a Chinese gaming company traded in New York, has lost 10% of its value in the past two days. Sina has fallen 15% while its peers in the online-media industry have slipped further: Yoku down 19%, Sohu and Weibo both down 20%, Changyou, another gaming company, is down 25%.

There are a couple of exceptions. E-commerce titan Alibaba is down 3% in the past two days, while Internet giant Baidu is down 5%. Both of those stocks are widely held and considered the blue chips of Chinese companies traded on US exchanges.

Few of these stocks saw the huge surges in share prices over the past year that their cousins on Chinese exchanges did, in which many recent tech IPOs tripled or more in value thanks to speculation and margin debt. Loans to individual investors may have risen as high as $1 trillion earlier this month. NYSE margin debt, by contrast, is around $500 billion.

When stock prices collapse, they prompt margin calls that require investors to either put up more money against the loans or sell the stocks, which only accelerates the selloff. But if investors in the US aren’t getting margin calls, why are the shares of Chinese companies traded on the NYSE and Nasdaq suddenly diving?

There are two key reasons. The first is that the declines on the Chinese exchanges have gone from a simple correction to a full-fledged selloff and now seems to be on the verge of something much more perilous: an all-out market panic.

That scenario seems likelier after the Shenzhen Composite fell another 2.5% Wednesday and the Shanghai Composite fell 5.9%. But those figures don’t tell the full story, because more than 1,300 companies have halted trading in their shares to prevent declines – including 32% of listings in Shanghai and 55% in Shenzhen. In total, 40% of the market cap on those exchanges can’t be bought or sold right now.

The second thing that changed this week is that it became apparent that the Chinese government, with its formidable ability to control many aspects of its economy, has met its match in the stock market. China recently cut interest rates, prevented any new IPOs and arranged $19 billion in purchases from fund managers, moves that only slowed the selloff temporarily.

On Wednesday, China’s central bank vowed to provide liquidity to help a state-backed margin finance company try to stabilize the market, once again to no immediate benefit. China’s efforts to stem the panic selling may end up like the Japanese government’s campaign to shore up stocks in Tokyo when that market collapsed in the early 1990s. Then, government money was spent only to slow an inevitable decline, as well as its recovery.

For Chinese companies, this is bad news because it threatens to stall consumer spending. As China’s growth has slowed, the government has tried to shift the economy away from a reliance on infrastructure and housing toward consumer spending. Many of China’s Internet companies listed in the US rely heavily on consumer engagement with e-commerce, games and ad-supported content.

The decline in US-traded stocks coincides with the spread of the selloff from mainland stock exchanges to the Hong Kong market. The Hang Seng Index fell 5.8% Wednesday and is now down 10% for the week. Tech stalwarts traded there are falling even further: Internet-media giant Tencent is down 14% this week and computer-manufacturer Lenovo is down 12%.

There is a broader concern here: The emergence of a stock bubble on Shenzhen and Shanghai exchanges occurred inside China’s borders. The popping of the bubble did too – until this week. It’s not just Hong Kong stocks and shares of Chinese companies traded in the US, the selloff is spreading for now to markets in countries that do a lot of business with China. Japan’s Nikkei 225, for example, was down 3.1%, dropping below 20,000 for the first time in nearly a month.

If the selloff in China does turn into a panic-driven meltdown, it could be bad news for US companies that have come to rely on the growing Chinese market for sales. GM said Tuesday its China auto sales were flat in June, even after it slashed prices 20% on dozens of models. Apple’s fortunes have revived recently on the success of its iPhones in China. The effect of the selloff on those sales last month may become apparent when the company reports earnings later this month.

Until now, the rise and fall of the Chinese stock bubble this year has been a fascinating spectacle to many in the US. And it remain that if the government does shore up the market or if the sense of panic dissipates. If not, the turmoil could end up slowing down China’s economy even further, and that could also become a drag for many US companies in this globally interconnected era.

TIME Markets

Why Biotech Stocks Are So Wildly Unpredictable

FRANCE-RESEARCH-AGRONOMY-INRA-FRANCIS-MARTIN
Jean-Christophe Verhaegen—AFP/Getty Images A photo taken on November 27, 2012 shows a sample of a plant before a biochemical analysis at the INRA Nancy (National Institute of Agronomic Research) in Champenoux.

Where there's growth, there's instability

To understand why some investors are growing nervous about the biotech sector, consider the recent IPO of Axovant Sciences. The company was founded last October, isn’t profitable, and has already racked up a $21 million loss. Its CEO has much more experience with hedge funds than he does with biotech startups. Axovant has only one product candidate, an Alzheimer drug it bought from GlaxoSmithKline last December after it was tested on 1,250 patients in 13 trials and then stalled in development.

Two weeks ago, Axovant went public in an offering that raised $315 million. Axovant, which paid $5 million for the Alzheimer’s drug, says it needs the cash because it will have to pay Glaxo as much as $160 million more if the drug makes it to market. Incredibly, the stock doubled on its first day to $31 a share, but has since fallen by nearly a third of that peak value.

And it could well fall further. But that’s not what worries longtime observers of the biotech sector. The real fear is that this kind of speculative behavior among investors is all too familiar from the biotech and dot-com bubbles of 2000.

“The fact that someone can make something of this size out of virtually nothing should be of concern to everyone in the industry,” Fierce Biotech editor John Carroll wrote about the Axovant IPO. “When biotech mania takes over and perfectly legal schemes like this rain money, the pitfalls start to look like the Grand Canyon.”

Of the 129 biotech companies that have gone public since early 2013, few are as speculative as Axovant. Many, though, have recently gone public with huge losses incurred by heavy spending on the development of drugs that may or may not find approval from U.S. and foreign regulators. Even those that do may be so specialized in the diseases they treat that they may not become blockbusters.

If the party in biotech stocks is over, a lot of investors don’t seem to have gotten the message. The S&P 500 Biotech Index has nearly tripled in the past three years. The index had stalled and moved sideway for much of the past spring, leading some to wonder whether the rally was spent. Instead, it’s gained another 11.3% over the past month. The Nasdaq Composite, by contrast, is up only 2.5%.

Several factors have been fueling the biotech rally of the past three years. For one thing, the U.S. Food and Drug Administration has been pushing to speed up approvals. According to Ernst & Young, the FDA approved 41 new drugs in 2014, up from 27 a year earlier.

Meanwhile, the genomics-based insights that emerged in the early 2000s are finally delivering on new drug therapies. That in turn has led biotech firms to increase their research and development spending by 20% a year. After a decade or more of few promising drugs, the new generation is finally bearing financial fruit. Revenue at U.S. and European biotech firms rose 24% last year, while net income rose 231%, Ernst & Young reckons.

While new drugs may continue to come through the drug pipeline, the risk is they won’t benefit any and all biotech firms, but rather a select few. In the meantime, more investor cash is pouring into the sector indiscriminately, even into more questionable startups like Axovant. Some investors suggest it’s safer to stick with the larger companies – the so-called Big Biotech firms – that have a few promising drugs in the works as well as a track record of high growth.

Biotech stocks are vexing for many individual investors because, more than Internet or other tech stocks, they involve arcane science, a long and complex approval process, and a business model that involves largely hit-or-miss products. At the same time, no one wants to sit on the sidelines while a stock – let alone an entire sector – can double in value over the course of a year.

Many individual investors have opted to invest in biotech ETFs and mutual funds. Both of them have outperformed the broader market, but of the two, biotech ETFs have been the stronger performers. The Fidelity Select Biotechnology fund (FBIOX), for example, has risen 27% so far this year, or nearly three times as much as the Nasdaq Composite.

Several ETFs are doing as well or even better. The iShares Nasdaq Biotech ETF (IBB), which tracks biotech stocks on the Nasdaq, is up 26%. The SPDR Biotech ETF (XBI), which tracks the S&P Biotech Index, is up 39%. And the ALPS Medical Breakthrough ETF (SBIO), which began trading in early 2015, is up 47%.

The XBI and SBIO funds have outperformed because they focus more on small and mid-sized biotech companies. Nine out of the ten largest holdings in the XBI have risen more than 50% this year, and seven of them have more than doubled.

The IBB, which has emerged as something of a proxy for the industry for many investors, is weighted much more heavily to bigger, more proven biotech companies. Its top ten holdings make up 59% of the ETF’s value, including giants like Gilead Sciences, Biogen and Amgen.

The volatility of small- and mid-sized biotech stocks mean they will fall sharply once the inevitable correction comes, whether they have promising drugs in the works or not. The wildcard in the sector is the possibility of a wave of M&A, which could drive up some stocks. Synageva Biopharma, for example, has risen 140% this month on news of a buyout by a larger biotech firm, Alexion Pharmaceuticals.

But if picking which company has the next blockbuster drug is tough, anticipating the next M&A target is even trickier. And the longer the biotech rally continues, the more important it becomes to pick the winners from the losers. At some point, for the average investors, staying on the sidelines becomes the smarter play.

TIME Companies

Here’s Why Nobody Can Agree About Apple’s Stock

Apple Unveils New Versions Of Popular iPad
Justin Sullivan—Getty Images Apple CEO Tim Cook speaks during an Apple announcement at the Yerba Buena Center for the Arts on October 22, 2013 in San Francisco, California.

Two years ago, things were looking bad for Apple investors. The stock had declined more than 40% from its peak in 2012, erasing nearly $300 billion from the company’s market cap. A debate emerged over whether the stock’s best days were over. The bears thought so. The bulls foresaw a rebound.

As we know now, the bulls were right – more right than they probably knew at the time. Apple’s stock has risen 116% in the past two years, or more than double the Nasdaq Composite’s 54% gain. But the bulk of those gains came in 2014 as the iPhone 6 sales exceeded expectations, especially in China, and as the company beefed up its dividend and buyback program.

For the past several months, though, Apple’s stock has been moving sideways — the stock peaked at $133.60 on February 24 and closed Monday at $127.61, or about 5% lower from that high point. This has ignited another burning debate between the Apple bulls and the Apple bears, who together are asking: are we headed for another Apple slump like the one that began in 2012?

The disagreement over Apple’s future involves several big questions. Let’s break them down here:

Will iPhone 6 stay hot? Since its release last fall, Apple has sold 136 million iPhone 6 and iPhone 6 Plus units through the end of March. That exceeded even some of the most bullish forecasts. Will sales remain strong through the iPhone 6S (or whatever Apple calls it) release and until the iPhone 7 is unveiled?

Bears look at the trajectory of the iPhone 5 and 5s and think not. Doug Kass of Seabreeze Partners, a longtime Apple bear, argued that “we’re well through the last important upgrade cycle” for the iPhone. But Pacific Crest analyst Andy Hargreaves said Apple’s suppliers and component orders suggest demand will remain stable, with Apple selling 52 million iPhones this quarter. That’s less than last quarter, but more than many analysts are forecasting.

Is there meaningful growth beyond the iPhone? A broader debate concerns whether Apple is relying too much on one product (the iPhone) with cyclical sales. Bears argue that it is. They point to the 29% drop in iPad sales last quarter, the fact that Macs now make up less than 10% of Apple’s revenue, and the scant impact that Apple Music, Apple Pay and Apple TV are having on growth.

More bullish analysts argue Apple is finally gaining ground and diversifying away from a reliance on the iPhone. Some see Apple Music and Apple Pay as new efforts at platforms that could add materially to profits in coming years. Katy Huberty of Morgan Stanley believes these services could make up as much as 20% of Apple’s revenue by 2017, offering a non-cyclical stability to Apple’s income.

Will new product categories bring new growth? There’s also sharp disagreement here, starting with the Apple Watch. Apple has not released any sales data on the Watch, but research firm Slice Intelligence estimated that 2.79 million units have sold since the device launched in April, with 17% of shoppers buying more than one Watch band.

Some early users of the Watch have expressed disappointment, suggesting limited mainstream appeal for the product. Others see the Watch as a work in progress, with Apple able to eventually add new features like a camera. Apple has a history of releasing products that underwhelm at first before becoming must-have devices. Few loved the first iPod on its release, and some questioned the potential of the iPhone in 2007.

Is Apple’s stock expensive? Apple is trading at 15.8 times its earnings over the past four quarters. Bulls will tell you that’s cheaper than the 20.6 ratio for the S&P 500. Bears will remind you Apple is a hardware manufacturer and is expensive relative to its peers in that sector. Either way, it’s cheaper than it was in 2012.

At UBS, Steve Milunovich noted that in 2012 Apple’s PE was above that of the S&P 500. Today, it’s lower, likely because of concerns about a slowdown in iPhone sales. Another difference from 2012: Back then, many big funds were overweight Apple, leaving little appetite to buy more shares. Apple made up 4.9% of the S&P 500’s capitalization then, and 3.9% now. And the company is spending more on dividends and buybacks today than it was two or three years ago.

The common thread throughout these areas of disagreement is the amount of faith analysts have in Apple’s ability to reiterate and improve on its existing products. If the status quo today isn’t – or can’t be – changed, then Apple is in trouble. Apple has greatly improved the iPhone over the years. It’s had less luck keeping iPad sales strong. Other products have been slow to improve: Until Apple Music, iTunes had been slow to evolve. And a better Apple TV has been awaited for years.

Apple is often seen as the premier Silicon Valley stock – a single proxy for many of the hottest areas inside tech. The reality is, for all its success and its $730 billion market cap, Apple stock has hit many rough patches in its time. It may be entering one of them now. But the long-term history of Apple shows that it never pays to bet against Apple for too long.

TIME stocks

Was 3D Printing Just a Passing Fad?

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Companies making "the next big thing" are having a tough 2015

It seems like once a decade there comes a technology so transformative it spawns several companies that become giants: Chips in the 70s (Intel, AMD), PCs in the 80s (Apple, Microsoft, Dell), the Internet in the 90s (Amazon, Google, eBay).

There are also innovations that are potentially just as disruptive but that, from the standpoint of investors, never offer an early chance to get in on the ground floor—the way Microsoft or Google did when they first went public.

Take nanotech, an investor fad a decade ago that faded because it wasn’t startups that brought it to market, but diversified giants like Intel and GE. Or solar energy, an important technology that is requiring decades to become a mainstream product but that involves costly manufacturing plants along the way.

And then there’s 3D printing, which is looking like one of those important but hard-to-invest-in technologies. For a while, it was looking like there were a few publicly traded stocks that could offer an early entry point in another promising technology but over the past year or so, it’s been looking more like another speculative frenzy playing itself out.

For decades, the technology that led to 3D printing was used in industrial design, creating quick and relatively cheap prototypes that could be tweaked without having to retool an entire manufacturing process. Then, around 2012, the buzz about the potential of 3D printing began to grow louder: It could could make customized shoes, empower DIY hobbyists, manufacture synthetic organs. Stratasys, an early pioneer in the field, even moved to prevent its printers from making homemade guns.

Along with the buzz, stocks of 3D printers caught fire. In the two years through 2013, Stratasys saw its stock surge 333%. That was nothing compared to 3D Systems, another pioneer in the field that expanded quickly by buying dozens of small companies in the space. 3D Systems enjoyed an 800% surge in its stock in the same two-year period.

Some pundits argued 3D Systems was a better long-term investment than Facebook or Apple. Others in the sector like ExOne and VoxelJet went public in 2013 and saw their stock prices double from their offering prices. But near the end of 2013, as warning signs emerged that the rally couldn’t last despite the technology’s promise, things took a turn.

Since early 2014, most of the stocks in the 3D printing industry have collapsed. Stratasys, 3D Systems, ExOne and VoxelJet have lost between 71% and 80% of their market value in the past 17 months. The reasons why are nothing new to investors who have speculated too early in promising technologies: Profits can be hard to come by, and revenue can fall short of expectations.

Recent earnings from Stratasys and 3D Systems suggest things are getting worse rather than better in 2015. In late April, Stratasys warned that its revenue would be much lighter this year than analysts had been expecting, while net income would also be smaller. Only three months earlier, the company issued a similar warning of disappointing earnings.

Stratasys’ announcement came a few days after 3D Systems issued its own warning that revenue and profit would be well below expectations. Both companies cited vague “macroeconomic” factors like higher oil prices and a strong dollar, which were forcing customers to cut back on capital spending.

Analysts weren’t buying those excuses. “3D Systems’ effort to explain the sharp pullback in unit demand was lacking, and Stratasys really doesn’t try,” Oppenheimer analyst Holden Lewis wrote. The problem wasn’t in 3D printing technology, which proponents say is finally delivering on its potential and still holds enormous potential in the future.

Instead, as is often the case with emerging technologies, the passage into a mainstream market is proving to be a slow and rocky one. Stratasys, for example, bought Makerbot in 2013 to get a foothold in the consumer end of the 3D printing market but consumers have been slow to buy in. Makerbot’s revenue fell 18% last quarter.

The bigger threat for 3D printing companies is that bigger, deeper-pocketed rivals like HP are making a belated but major push into the market, which may be giving customers pause. “Corporate buying managers are delaying purchases while they anticipate HP’s multi-jet fusion product in 2016,” Dougherty & Co. analyst Andrea James wrote recently.

Such broader concerns about 3D printing companies have dragged down the stocks of ExOne and Voxeljet as well, even after a mixed earnings report from the latter last month. Balancing the short-term demands of investors with technologies that take a long time to mature predictably leads to volatility. If things don’t turn around soon, some companies may be bought by a giant like GE.

But just because the hype surrounding 3D printing got out of hand quickly doesn’t mean the technology itself isn’t promising. There’s still plenty of potential in the market longer-term—there is in cleantech and nanotech. It will just take time to deliver on that potential. And meanwhile, speculative investors who are characteristically short on patience move on to the hottest new technology idea.

TIME

Here’s the Real Bubble We Should Be Worrying About

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Pgiam—Getty Images Stock market analysis

Bigger and bolder than anybody realizes

While people in Silicon Valley have been arguing over whether we’re seeing another tech bubble–a debate that has been burning for the past ten years–they may have missed the real stock bubble driven by tech mania: China’s red-hot stock exchanges.

The Shanghai Stock Exchange Composite Index is up 149% over the past year, while the Shenzhen Stock Exchange Composite Index is up 190%. The Nasdaq Composite, the historical proxy for publicly traded US tech companies, has risen 16% in that time.

And what about the private markets that have given huge valuations to US tech companies like Uber? A year ago, Uber raised money at a $18 billion valuation, and now investors are close to valuing it near $50 billion. That’s a 175% increase in a year, and it very well may be a sign that investors are acting irrationally.

But there’s a difference between irrational–which happens often enough even in healthy markets–and outright madness. Consider Beijing Baofeng Technology, a maker of virtual-reality headsets that has become something of a poster child for the Shenzhen bubble because of its outsize valuation. Beijing Baofeng went public in late March and has since risen more than 2900%. And that’s after news of a copyright lawsuit curtailed its rally last month.

What’s driving the gold rush on China’s exchanges? A key factor is that a lot of new wealth in China is constantly looking for a haven. For a while, that meant real estate, until China’s government moved tocrack down on property speculation. That chased some speculative money into other places like the Bitcoin market, until a new flood of IPOs on the Shenzhen market began to ignite yet another rally last fall.

Chinese regulators are locked in a cat-and-mouse game with speculators. They can never quite eliminate bubbles, only chase them to other markets. Before the real-estate bubble took off several years ago, the Shenzhen and Shanghai exchanges saw even more pronounced booms and busts. In 2007, the Shenzhen Composite rose more than tripled. In 2008, it fell by 67% from the peak.

This year, China has made moves to quell stock speculation. In January, Chinese stocks plunged 8 percent in a day after regulators tightened margin-lending requirements. They soon resumed their rally for a few months until regulators clamped down on leveraged buying while expanding short sales. Again, share prices surged even higher until last Thursday, when brokers tightened margin-trading requirements once again.

You can guess what happened after last Thursday’s rout. Shenzhen stocks have roared back to new highs while Shanghai stocks are close to doing so. The sentiment among investors seems to be that the moves to curb speculative trading are outweighed for now by broader moves the Chinese government has been making to foster growth industries and loosen some financial market rules.

Last month, China unveiled “Made in China 2025” its latest initiative to strengthen startups involved in digital technology, cleantech, biomedicine and robotics. Regulators have also lowered the financial requirements allowing tech startups to stage an IPO on exchanges. And other changes are making it easier for Hong Kong and international investors to invest in mainland stocks, and vice versa.

All of this has kept the bonfire burning in Shenzhen’s market, which is home to more startups in tech and other growth industries industries, while Shanghai has historically been dominated by state-owned blue chips. But it’s creating some phenomena that are reminiscent of the dot-com bubble in the US at the turn of the century.

As Bloomberg noted recently, all but a dozen or so of the 1,700 companies listed on the Shenzhen exchange have seen their stocks rise in the past year – a sign of a broad-based mania. It’s not unusual there to see a stock surge 500% in a few months, leaving the median P/E ratio above 100 – and some companies with P/E’s above 10,000. One troubled real-estate company even repositioned itself as a tech company and saw its tumbling stock suddenly rally.

Investors tempted to jump belatedly into China’s 2015 stock rally might want to recall the greater-fool theory. Booms end in busts, and the turning point may be hard to time but it’s inevitable.

For Silicon Valley, there is a reassurance here as well as a warning. What’s happening in Shenzhen and Shanghai reminds us what a real bubble looks like. We are nowhere near that point right now. But then again, it only took a few months for a bubble to appear on China’s exchanges. And it likely happened when too many people had grown complacent about the likelihood of another bubble.

TIME Media

Why Disney Is Poised to Absolutely Dominate

Measles California
Jae C. Hong—AP Sleeping Beauty's Castle is seen at Disneyland on Jan. 22, 2015, in Anaheim, Calif.

The Mouse House is on a epic winning streak

Luke Skywalker. Tony Stark. Elsa and Anna of Arendelle. Captain America. Woody and Buzz. The fictional heroes of family entertainment have never dominated popular culture as much as they have in recent years. And there is one company that is largely responsible for that: Disney.

Founded nearly a century ago, Disney has long-held a firm place in America’s popular imagination, but even within that long history the past decade has been an impressive ride. Since Bob Iger took over as CEO in 2005, Disney’s stock has more than quadrupled while the S&P 500 is up 77%. Most of the gains have come since 2011 as Iger’s early moves began to bear fruit.

And so some Disney shareholders have come to regard Iger with the kind of awe children have for Disney’s franchised superheroes. But in recent months a debate has broken out between bulls and bears over how long the rally can continue.

While no one is doubting Disney’s immediate future, some analysts are concerned about the stock’s heady valuation. Disney is trading at 26 times last fiscal year’s earnings and 22 times its estimated earnings this year. The Dow, by contrast, is trading at 16 times its recent earnings.

Of the 31 analysts covering Disney, 12 of them have a hold rating on the stock – often a rating given when an otherwise healthy stock has grown pricey. It’s not just analysts who are cautious. Goldman Sachs recently calculated that hedge funds have an aggregate $4.5 billion in short interest in Disney, second only to AT&T among US stocks.

The thing is, Disney isn’t just growing, it’s performing so well that it’s surprising even the bulls. In March, one analyst downgraded Disney purely on its valuation,arguing further gains would be limited. But this month, Disney beat Wall Street’s consensus estimate for the fifth time in the last six quarters. Following its last earnings report, seven analysts raised price targets to between $120 and $125 a share. Disney closed Friday at $110 a share.

So while the bears argue that Disney is priced for perfection, bulls counter that the company has enough kindling to keep the bonfire burning for some time, largely because of two things Iger has built over the years: a steady lineup of content that appeals to the masses and an interlacing of Disney divisions that can feed business to each other.

This is especially clear in the film business. In 2006, Disney bought Pixar, an impressive deal given the bad blood that has existed between Steve Jobs and Iger’s predecessor Michael Eisner. Three years later, Disney bought Marvel Entertainment just as it superhero franchises were entering a renaissance. And in 2012, the company bought Lucasfilm just as a new Star Wars trilogy was being planned.

So far in 2015, Disney’s Cinderella has brought in $521 million worldwide and Avengers: Age of Ultron has pulled in $1.2 billion. The company’s Tomorrowland topped the weekend box-office in the U.S., but the movie fell short of expectations in what was the film industry’s lowest-grossing Memorial Day weekend since 2001. But Disney is only getting warmed up: Two Pixar movies, Inside Out and The Good Dinosaur, are coming this year, along with Star Wars: Episode VII – The Force Awakens. The anticipation of Star Wars is especially high–the latest trailer alone has already had more than 200 million views.

Beyond this year, Disney has a Jungle Book remake coming in 2016, along with Captain America 3, Finding Dory and a sequel to 2010’s Alice in Wonderland, which topped $1 billion in receipts. Frozen 2 and Toy Story 4 are in the works. And the Marvel lineup will remain busy, with new Thor and Guardians of the Galaxy films and two Avengers movies expected through 2019.

The relentless parade of blockbuster fare may feel manufactured but, for Disney, they are paying off through multiple revenue streams. Sales of Frozen merchandise in the past six months rose tenfold over the year-ago period, even though the movie was released in 2013. EA is timing a Star Wars: Battlefront game to coincide with the film’s release, and the Playdom gaming studio Disney bought in 2010 is working on Star Wars- and Marvel-themed games as well.

There are also tie-ins for theme parks, like Tomorrowland. Theme parks have become a growth area with operating profit in the unit growing 22% over the past six months. Disney is planning to open a new theme park in Shanghai in 2016, which could add to revenue in coming years.

The one area of potential weakness is in Disney’s largest unit, the media networks business including ESPN and ABC, which saw operating income flat in the last six months while revenue rose 12% in the period. In a call with investors, Disney cited higher programming costs for NFL and college football games as reasons for the flat profit in the division.

While it’s easy to imagine Disney’s growth continuing, it’s also easy to see areas of vulnerability. Audiences moving from broadcast TV and cable subscriptions in an era of on-demand Internet TV could slowly bleed Disney’s media-networks business. Disney has made moves to adapt to a world of over-the-top television, but the transition has started to accelerate this year.

The blockbusters could also become a vulnerability. Critics often chide the lack of originality in Hollywood’s blockbuster machine, and at some point audiences might lose their appetite for a glut of blockbusters. Tomorrowland, for example, drew only $40 million over the weekend, a disappointing take for a film with a $190-million budget. It doesn’t even rank in the top 20 grosses for Memorial Day openers.

For now, investors seem confident in Disney as long as Iger remains at the helm. Last fall, Disney extended Iger’s contract for the second time, pushing his retirement date back until 2018. More than any movie Disney’s studios may have in the works, the sequel investors are most interested in seeing is the success story Iger has brought to Disney shares.

TIME Turnarounds

How Sony Got Up and Out of Its Death Bed

President and CEO of Sony Corporation Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show in Las Vegas
Steve Marcus—Reuters President and CEO of Sony Corporation Kazuo Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show (CES) in Las Vegas, Jan. 5, 2015.

For the first time in a decade, the electronics company has a shot

In the annals of consumer electronics companies that have slipped from great heights, none has taken a bigger fall far from its glory days than Sony. But after years of struggling to right itself, the company is finally making real progress on a turnaround.

Just as Apple helped revive itself in the early 2000s with the iPod, Sony built much of its success on the idea of helping people carry music around in their pocket–first with the transistor radio in the 50s and 60s and later with the Walkman portable cassette player. Those products, coupled with smart engineering, made the Sony brand synonymous with peerless quality.

In the early 2000s, Sony began to lose its competitive edge. Rivals like Samsung had emerged to undercut its higher-priced TVs and stereos. Sony couldn’t get a foothold in new markets like mp3 players. Its earlier expansion into new areas like insurance and its overspending on film and music studios left it with a structure that was at once bloated and siloed.

Sony named Howard Stringer as CEO in 2005 to turn things around. Stringer cut a charismatic figure, but couldn’t speak Japanese and, as a lifelong media executive, lacked an engineering background. Stringer tried to conjure a convergence of electronics and media properties that never quite gelled. (Stringer is on the board of Time Inc.) Meanwhile, further setbacks struck: the global recession in 2009, the Fukushima earthquake in 2011 and a stronger yen that hurt Japanese exports.

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Sony has posted net losses for six of the past seven years. As a result, the price of its ADRs traded on the NYSE fell from $55 in early 2008 to below $10 in late 2012. (An ADR is a stock that trades in the U.S. but represents a specific number of shares in a foreign corporation.) Its credit ratings eventually fell to near junk levels. But then things began to look up: After bottoming out below $10 in 2012, its ADRs have risen back near $33 this month, a rally of 238% in the last two and a half years.

The change came after Sony replaced Stringer with Kazuo Hirai in early 2012. Hirai was a Sony veteran known for wringing profits from troubled businesses like the PlayStation gaming division. And like Stringer, Hirai didn’t fit the mold of the Japanese salaryman. Hirai grew up in Japan and North America, giving him a fluency in English and also a gift for being plainspoken, like when he told the Wall Street Journal on taking the job, “It’s one issue after another. I feel like, “Holy shit, now what?”

Hirai began an ambitious restructuring of Sony over the three years that followed. He quickly announced a “One Sony” structure that built on Stringer’s convergence with an emphasis on communication and joint decisions among siloed divisions. He focused the electronics business on mobile, gaming and imaging products. Over time, he cut thousands of jobs, sold off the Vaio PC unit, separated the ailing TV business into its own company and overhauled the smartphone lineup.

All of this added to financial losses with restructuring charges and made for a tumultuous 2014. But the low point came last November, with the infamous hack that left sensitive documents from Sony Pictures Entertainment in public view. But it was just around this time when some analysts began voicing their conviction in a Sony turnaround. The turnaround painstakingly plotted by Stringer and Hirai was finally bearing fruit.

That became more evident when Sony reported its most recent earnings. There were encouraging signs in the past year’s finances, like revenue rising 6% and the TV business posting its first profit in 11 years. But the better news was in the cautious forecast for the coming year.

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The bulk of the restructuring was behind Sony, CFO Kenichiro Yoshida said, and while revenue may decline 4% this fiscal year, operating profit would rise fourfold to $2.6 billion, its highest profit since 2008. Hirai had earlier projected net income to rise above $4 billion by 2018, which would be its biggest profit since 1998, before the great fall began.

There’s still some restructuring to do. The revenue decrease this year will come largely from Sony’s move away from mid-range mobile phones to focus on the high end of the market. While camera sales continue to decline, Sony is seeing strong growth in imaging sensors used in smartphones. Overall, Sony will be a smaller company in terms of revenue but with bigger sales and slow, steady move from aging markets into growing ones.

A turnaround needs more than cost cutting and restructuring. Sony has a long road ahead to go from playing catch-up in technology markets to playing a leading role in new ones. That step requires a lot more work, but Sony’s return to profitability makes a major turnaround as feasible as it’s been in more than a decade.

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