What Does the Tech Sell-off Say About the Trillion-dollar Titans?

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Arlene Ewing, investment manager at financial adviser Brewin Dolphin Glasgow, examines the fortunes of the world’s tech giants and believes that, as they grow, so do the risks.

Arlene Ewing of Brewin Dolphin, w

How the mighty can fall. If October was a scary time for tech stocks, November has come with its own set of shocks.

Although the FTSE 100 has been far from immune, the sell-off of the past couple of months has been more acutely felt in the US, where tech shares have led a decade-long bull market. The Nasdaq Composite Index was down just over 14% from the start of October to the middle of November and the S&P 500 shed nearly 10% of its value in the same period.

Is it the overdue return of a bear market, a ‘tech correction’, or a different beast altogether? It’s been characterised by commentators in different ways, but the overriding feeling seems to be that earnings and growth have peaked. The sell-off on 19th November alone wiped 20% off the FAANG stocks – Facebook, Amazon, Apple, Netflix, and Google (Alphabet).

Ups and downs

Two of these businesses are worth examining in more detail. In September, Amazon became only the second company ever to be valued at $1 trillion. Eight weeks later it had lost around $250 billion. A rally at the beginning of November was cancelled out by the middle of the month.

Meanwhile, compared to its tech contemporaries, Apple had a better October, losing just 2% of its value and maintaining its $1-trillion status for longer than Amazon. However, November’s declines were much more precipitous, with the company’s shares down by one-fifth in the first three weeks of the month.

That could be a sign of investors’ fears beginning to bear out. While Apple’s technology has set it apart, there’s little preventing it from being replicated at a cheaper price elsewhere. In fact, Q3 2018 figures from the International Data Corporation put Apple’s share of the global smartphone market at 13.2%, behind Samsung (20.3%) and Huawei (14.6%), with Xiaomi not too far behind.

Meanwhile, there’s always uncertainty over sales of new products – as the cut in iPhone production demonstrates all too well. According to research from Strategy Analytics earlier this year, Apple’s HomePod was yet to capture more than 6% of the smart speaker market – a product for which the company had high hopes.

In some ways, these problems are mirrored at Amazon. The company reported net income of $2.9 billion (£2.28 billion) on revenue of $56.57 billion (£44.4 billion) for Q3 2018 – up 29% on the same period in 2017. And even though sales were strong and profits were up significantly, many felt the figures were underwhelming amid concerns over international retail and unit shipments.

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But, Amazon’s main problem could be the sheer number of ideas it’s taking on. One is a partnership to create a ‘reasonable-cost’ healthcare company in the US, while it’s also reportedly looking into car insurance and a host of other markets.

These are no mean feats, and there is always the risk that these ideas don’t work and turn into money pits. Its web services division and Prime notwithstanding, estimates suggest that Amazon lost about $2 billion (£1.57 billion) in Q1 2018 on some of its other functions. Likewise, with expansion comes attention – not least the US President’s well-aired views on the company. Regulators may start to look at Amazon in a new way.

Apple and Amazon have created a lot of value for shareholders; but, as Tim Cook recently alluded to, they are entering new eras. Forecasting their revenues is still guesswork – hence the volatility that followed their respective updates. As the businesses grow, so do the risks – and their ability to innovate, generate cash and diversify, could go the other way.

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