Bear market territory is close for tech stocks
Recently, stock prices for tech companies have taken a beating. Even more so than the overall market indices. For example, Linkedin share prices have declined 40%, Apple has dropped 21 percent and during the same period. The “new tech” FANG stocks — Facebook, Amazon, Netflix, and the Google unit of Alphabet — have also fallen out of favor, with Facebook off 7 percent, Amazon down 26 percent, Netflix off 27 percent, and Google-parent Alphabet down 7.5 percent.
So, have tech stocks hit rock bottom?
At the risk of using the most clichéd response of all time – it depends. Companies who are fundamentally weak, especially with their balance sheets and cash flows, will take a further beating. On the flipside, companies with strong free cash flow generation, solid balance sheets and resilient recurring revenue are looking increasingly attractive.
Find out what analysts have to say about tech stock valuations here.
Changes in company valuations
Another trend that appears to be catching on is the change in the way investors are valuing companies. Price to sales ratios, once considered the go-to metric for company valuation, have become a lot less relevant in this period of market uncertainty. Currently, investors are beginning to rely more on balance sheets and cash-flow metrics (leverage ratios and operating cash flow yields).
Going forward, we are likely to see corporate earnings coming in weak and below expectations. Good companies will survive and weak companies will fail. Is this shake-out bad for the tech sector? Not necessarily. Over the years, a lot of hype has been built upon tech and this period of impending consolidation would cut a lot of fat and inefficiencies in the industry. Investors who overpaid will suffer and valuations will finally come back to earth. As Warren Buffett stated “Only when the tide goes out do you discover who’s been swimming naked.” Now it’s time to wait and see which companies will turn up bare and exposed.