In tech selloff, fears of bubble 2.0

First came the slaughter of the "unicorns." Now internet giants are under pressure, too.

The US technology sector has had a miserable start to the new year. Investors no longer believe rosy economic growth forecasts that are the basis for sky-high company valuations.

The selloff is evoking painful memories of the dot-com collapse of the turn of the millennium. Will a tech bubble burst again?

The broad-based Standard & Poor's 500 Index has lost nearly 10 per cent since the beginning of the year. But tech stocks have taken a particularly big hit.

The Nasdaq Composite Index, home to tech heavyweights Apple, Amazon and Google parent Alphabet, has lost 15 per cent since January 1, wiping out billions in market value gained since the end of 2014.

It could get worse, insiders warn.

Venture capital investor Hany Nada told financial broadcaster CNBC recently that he believed technology sector valuations were inflated. Some companies are selling at double their estimated value.

The tech storm began with growing skepticism about start-ups that were not yet listed on the stock market. For years, investors had showered them with money in hopes of future windfalls.

But the prevailing winds have changed, and now these "unicorns" are being closely scrutinized.

Unicorns - so called for their mythic rarity - are unlisted companies valued at more than 1 billion dollars. Uber, Airbnb and Snapchat are prominent examples.

But after one of these legendary beasts, Twitter co-founder Jack Dorsey's payment app Square, went public in November and flopped, the whispers began.

Investors are now looking more closely at other companies, too. Fidelity Investments cut its shares in social media app Snapchat by a quarter. Shareholders began to realize that not all the high-priced tech treasures would fulfill their promises of growth.

The doubts have spread - and now even the sector's giants are in investor's sights. Amazon has lost 20 per cent of its market value since the beginning of the year, Twitter nearly a third, LinkedIn more than half.

Even Apple and Alphabet, the two most valuable companies in the world, have felt the downward pull, recently falling 10 and 9 per cent, respectively.

At some companies, like Yahoo and Twitter, the problems are serious and real.

But Apple and Alphabet earn billions, and both sit on mountains of cash.

Quarterly earnings don't explain the trend either - 65 per cent of tech companies beat analysts' expectations, compared to only 49 per cent of S&P 500 companies.

The selling trend can only be understood as investors having second thoughts. Warnings of a tech bubble are not new, and some valuations seem truly fantastical - like car service app Uber, valued above 50 billion dollars, more than General Motors.

Despite that, most analysts say that comparisons to the dot-com crash don't fit. As a reminder, back then AOL paid 160 billion dollars for media concern Time Warner. In May 2015, Verizon bought the internet dinosaur for 4.4 billion dollars.

JP Morgan analyst Marko Kolanovich said he expects tech stocks to slide more - but that there's no "broad-based bubble" in the tech sector.

Last update: Tue, 28/06/2016 - 17:25
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