Weekly Update #262: Facebook and Netflix Lead Broad Tech Sell-Off

Charts of the Week - Facebook and Netflix Lead Broad Tech Sell-Off

Source: YCharts data as of market close on 7/30/18

Source: YCharts data as of market close on 7/30/18

Tech stocks continued their selloff at the beginning of this week, with the tech-heavy NASDAQ falling 1.39% and the companies comprising the FAANG group--Facebook, Apple, Amazon, Netflix and Google-parent company Alphabet--all beginning and ending the day in the red. Monday’s results mark the first time the NASDAQ has had three consecutive declines of greater than 1% in nearly three years. Facebook and Netflix were the biggest FAANG losers of the day, falling 2.09% and 5.59%, respectively.  

Facebook’s performance comes off the heels of an over $100 billion market value drop last week after it missed Wall Street estimates and warned investors that sales growth could slow considerably as the company invests in user privacy after the fallout from the Cambridge Analytica scandal. Similarly, Netflix’s losses reflect poor recent performance after Netflix reported earlier this month that its customer acquisition goals had fallen short by about one million during the second quarter of 2018.

Investors seem to be worried about what the recent tech sector performance means for the overall market and economic expansion, already the second longest on record. However, to put the recent days’ market activity into perspective, we note some key investor considerations below as we await the earnings releases of other tech giants later this week:

• Performance from the other tech giants remains strong.  Despite high-profile stumbles at Facebook and Netflix, Alphabet and Amazon both posted stronger than expected quarterly results.  Alphabet’s profit fell to $3.2 billion in the quarter (down from about $3.5 billion in the same period a year ago), although without the $5 billion fine the European Commission levied on Alphabet last week, the company’s profit would have been $8.3 billion. Additionally, Amazon posted its largest quarterly profit in history--$2.5 billion on the success of its cloud computing and advertising businesses.
• Since the writing of this weekly update, Apple also announced earnings for the quarter ended June 30, 2018, surpassing Wall Street estimates on record quarterly performance. Apple posted quarterly revenue of $53.3 billion, an increase of 17 percent year-over-year, and quarterly earnings per diluted share of $2.34 (an increase of 40 percent). As of market close yesterday, Apple also became the first company to reach a market value of $1 trillion.
• Moreover, the overall market continues to display resilience. As of last Friday, 83% of the companies in the S&P 500 that had reported quarterly results posted stronger-than-expected earnings, and 73% beat revenue estimates.  Notably, earnings overall are tracking to a 21% increase.  Even Facebook, despite the massive market loss it has experienced in recent days, has performed objectively very well--with quarterly earnings up 32% and revenues up 42% year-over-year (and up 11% quarter-over-quarter).
• Despite the overall market strength noted above, there certainly are strong views that valuations are stretched across the tech sector, as we have been hearing for quite some time. Additionally, public perception of the industry has deteriorated, with half the public now believing that major tech companies should be regulated more than they currently are in the wake of recent data scandals. Regardless of which side you fall on in the debate as it stands, we will see more data points in the coming weeks that will hopefully give us a fuller picture of where we are heading.

Other items we are reading:

• BMW’s Alexa integration gets it right
• Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech
• Investors Step Back From Social-Media Highfliers
• Self-driving car startup Zoox is raising $500 million at a $3.2 billion valuation
• Spotify results hit wrong note with investors
• The CEO of Nextdoor, Nirav Tolia, will step down
• In yet another 2018 IPO, the freelancing startup Upwork has filed to go public
• The blockchain begins finding its way in the enterprise