‘A Storm in a teacup’ – the great technology stock sell-off

Alarm bells are ringing and red flags are being waved as technology-related share prices have taken a tumble. Stock markets across Europe, Asia and the US continue to wobble as investors off-load ‘overvalued’ (their words, not mine) shares in technology companies around the world. Kicked off in the middle of June, the so called ‘big five’ US technology firms – Microsoft, Apple, Alphabet, Amazon and Facebook – lost around $100 billion on the New York stock exchange as investors dramatically turned their back on a hugely
inflated market. 

And with the technology bellwether Nasdaq Composite Index tumbling by -1.8 per cent in just 24 hours, the UK’s FTSE 100 was knocked by -0.3 per cent, the next day.

But what does it really mean? Will it affect the Channel as a whole or is it a problem reserved for the ‘big five’ firms? 

The reality is that the sell-off is a reflection of the top end of the market that grew too fast for its own good. As Westcoast MD Alex Tatham says, the technology sell-off is merely ‘a storm in a teacup’ reserved for the top five and unlikely to impact on the rest of the Channel. 

The scaremongering that technology has had its day is far from a reality. “The IT industry has defined the last 40 years and will define the next 40,” Tatham says. “Whether there are new technologies on the horizon or in development by the existing behemoths, technology is THE area to invest in. The best businesses will continue to progress and any sell-off is more likely to be profit taking by brokers.” 

That is the sentiment running through the entire industry. In the past month, Alphabet (Google’s parent company) and Amazon both surpassed the $1,000-per-share mark as the top five all announced record figures for the year thus far. While many industry analysts hailed the achievement as reflective of a booming technology sector reaping the rewards of investment, some corners were sceptical, asserting that the growth was unsustainable. 

TP-Link retail sales director Lino Notaro believes that the sell-off is in fact a good thing for the sector as a whole. “It’s fair to say that so far this year U.S. tech shares have seen ‘blisteringly’ good performance,” he says. “So I would say a ‘healthy correction’ was a little overdue and not necessarily a bad thing. By its nature the market is volatile and judging by the recent announcements from E3 and ADWC, there is still plenty of innovation. Consequently, I don’t believe there is anything to worry about in the mid-to-long
term future.” 

Meanwhile, Notaro’s colleague, Ben Allcock (commercial director at TP-Link) expects the market to pick up after a brief blip. “For the last seven years, the US stock market, the NASDAQ in particular, has seen phenomenal growth, and history shows this isn’t sustainable without a few bumps along the way,” he comments. 

“It’s fair to say that the market was spooked by the outcomes of the latest FOMC meeting, which will result in some short-term volatility but I don’t think it’s a true reflection of market conditions or these particular organisations: it’s a reaction to the macro environment.” 

He adds: “Many factors affect the stock market, from the political climate to natural disasters, a healthy market correction wouldn’t surprise me based on historical cycles but it doesn’t concern me. Unless there is a sustained sell-off over a prolonged period, this short term volatility might just bring some opportunity to those playing the markets.”

But is that as good as we can expect? If the market is to level out to ‘more realistic’ figures does that mean we will never see another $1,000-per-share company? Quite the opposite says Context UK and Ireland country manager Jonathan Wagstaff. Companies – and the tech sector as a whole – will continue to grow, no doubt about that. “The general response so far to the sell-off has been that it is due a pause and readjustment, and that the sector will pick up again later in the year.” 

“On paper, if you compare, say, Amazon to other major listed companies, the fact is that its shares traded at over 180 times its earnings over the last 12 months. It’s never paid a dividend, and operating margins hover around two per cent, you would expect alarm bells to be loudly tolling. 

“The Amazon model however has been to continually reinvest in new sectors, and improve market-share. Arguably, wherever Amazon has extended its services they have excelled and upped the ante – Amazon Web Services and Amazon Prime Video come to mind. The company’s valuation is partly based upon future earnings; so long as their progress continues unabated there’s scant reason to think that such estimates are fantastical. 

For some of the other ‘big five’, their businesses are evolving – in the case of Apple, recent slugish hardware sales were brightened by a fast-growing services division which could soon be a Fortune 100 company in its own right.”

So the big technology sell-off is looking like more of a blip than anything to be majorly concerned about. The world isn’t crashing around us, investors will continue to pour money into tech firms and that is good for the industry as a whole.

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