The tech sector has already lost 6% of its value since early March, and unfortunately there are signs that it still has further down to go. In some ways the tech sector might be a victim of its own success. After years of outperforming expectations, raised expectations and slowing growth make for disappointing quarterly earnings reports...
The market tumbled into the week with the Nasdaq on Monday continuing a three-day selloff that has led to the biggest three-day loss on the tech-heavy index since 2011. The tech stock selloff began to spill over into the rest of the market on Friday, shaving 1.1% off the S&P 500 and 1.3% off the Dow on Monday alone. This is worrying a lot of analysts, who note that the momentum with which the jitters spread out from the tech world is troubling, with the S&P going from a record high to a net loss on the year in the span of 48 hours.
This may be the beginning of a wave we've been expecting all year. Newly released data indicates that Q1 saw the most first quarter IPOs since 2000, an ominous parallel to the height of the dotcom bubble when tech companies could do no wrong and Greenspan's patented “irrational exuberance” ruled the markets. This time, tech companies are blazing the trail once again. After the unrealistic valuations of companies like Facebook and Twitter in recent years, we're seeing more and more companies hoping to cash in on the trend by going public. The latest culprit is King Digital Entertainment, a company that is known for precisely one product: an addictive mobile game called Candy Crush that became a viral sensation and helped the company pocket $2 billion in gross revenue last year ($568 million). The fact that the company, which makes other games but is known in the industry as a “one hit” wonder “only” received a $7 billion valuation.
As always, venture capital funding is paving the way in this tech bubble 2.0. 2013 was a banner year for vc-backed tech companies, with 82 companies raising $11.25 billion, the most such IPOs since 2007.
The tech sector has already lost 6% of its value since early March, and unfortunately for those seeking to gamble on Silicon Valley, there are signs that it still has further down to go. The average P/E ratios for companies on the Nasdaq is 18 to 1. That compares to 16 to 1 on the S&P. In some ways the tech sector might be a victim of its own success. After years of outperforming expectations, raised expectations and slowing growth make for disappointing quarterly earnings reports and sinking stock prices.
It's good for bargain stock-hunters to keep in mind that even those who bought into tech stocks after the dotcom bubble burst suffered as the market plunged even further. Those who bought in in 2001 suffered another 33% loss on the Nasdaq 100 that year. We may be seeing a repeat in 2014.