Once-soaring tech stocks sink in sobering comedown

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SAN FRANCISCO (AP) — The stock market’s laws of gravity are ravaging its highest fliers.
Just
look at the list of technology trailblazers whose values have plummeted
from record highs during the past few weeks. Investors have re-focused
on safer sectors such as utilities, health care and consumer staples
instead of companies that promise potential growth from online services
that are building huge audiences.
Stung by the abrupt change in
sentiment, the stocks of recent stars such as Netflix, Facebook, Twitter
and LinkedIn are 20 percent to 45 percent below their recent peaks. The
steep downfall is raising questions about whether this is just a
fleeting fit of fickleness or the foreshadowing of another market bubble
about to burst.
Stocks across all sectors dropped Friday. The
tech-driven Nasdaq composite index fell 54.37 points, or 1.3 percent to
3,999.73 to punctuate a punishing week, and is down 8 percent since
early March, when it hit a 14-year closing high of 4,358. Last year, the
Nasdaq soared 38 percent.
The Standard & Poor’s 500 index
fell 17.39 points, or 0.95 percent, to 1,815.69 Friday. The S&P 500
is 4 percent off its recent high on April 2.
Optimists expect a
rebound. They point out that technology remains a bright spot in an
otherwise dreary economy as software, computers, mobile devices and the
Internet fill increasingly instrumental roles in work, entertainment and
communications.
"Tech is where the action is," says longtime industry analyst Roger Kay.
Pessimists
view the tech sector as Ground Zero for a long-overdue reckoning. They
say the stock market has been pumped up by the flood of money that the
Federal Reserve has funneled into the long-term bond market since the
financial meltdown of 2008 decimated the economy. Now that those
government-backed bond purchases are tapering off, people are starting
to realize "the only thing holding this balloon up is the Fed blowing
air in it," said Fred Hickey, editor of The High-Tech Strategist
newsletter.
That’s why he believes investors are parachuting from stocks that had soared to dizzying heights in a
short period of time.
Internet
video subscription service Netflix Inc., for instance, nearly
quadrupled in value last year to top the charts of the bellwether
Standard & Poor’s 500 index. The company was worth $27 billion by
the time its stock peaked at $458 early last month. At that price,
investors were paying the equivalent of $117 for every $1 of Netflix’s
projected earnings. Investors were betting Netflix will become
increasingly prosperous as the number of U.S. subscribers to its
$8-per-month video steaming services swells from 33 million at the end
of last year to management’s long-term hopes for 90 million.
Even
Netflix CEO Reed Hastings cited the "euphoria" surrounding the stock as
he discussed the company’s quarterly earnings last October. "We have a
sense of momentum, investors driving the stock price more than we might
normally," Hastings said in a video presentation. "There’s not a lot we
can do about it."
Netflix’s stock closed Friday at $326.71, nearly 30 percent below its peak.
Another
mind-boggling run-up occurred after short messaging service Twitter
Inc. priced its initial public offering at $26 per share in November.
By late last year, Twitter’s stock had more than doubled to a peak of
$74.73. At that level, Twitter boasted a market value of roughly $50
billion, even though the San Francisco company has never turned a profit
in its eight-year history. The stock lost nearly half its value as it
tumbled down to about $40. That still leaves Twitter with a market value
of about $28 billion.
"It’s the most insane pricing I have seen since 2000," Hickey says of technology stock prices.

Invoking
the year 2000 is touchy subject in technology circles because it
harkens back to the end of the dot-com boom. The Nasdaq composite index
closed at an all-time high of 5,047 in March 2000 and then plunged 78
percent before bottoming out at 1,108 in October 2002.
By one key
measure, tech stocks aren’t nearly as overvalued as they were in 2000
when the accelerating adoption of personal computers and the early days
of the World Wide Web drove an investment fervor that lasted through
most of the 1990s.
By March 2000, investors were paying $68.72 for
every $1 in earnings generated by companies in the S&P 500
information technology index, according to S&P Capital IQ. Last
month, the ratio stood at $18.26 for every $1 in earnings in the same
index.
"This is like a little bubble that kind of popped up in the
past year or so," said Daniel Morgan, a portfolio manager at Synovus
Trust Company, who focuses mostly on technology. He noted that most tech
stocks besides iPhone maker Apple Inc. have lagged other sectors since
the current bull market began in March 2009.
While more
speculative stocks such as Netflix and Twitter have seen big increases
in the past year or so, Morgan noted that long-established tech
companies are still holding up relatively well. Many companies in this
older crop, including Yahoo Inc., Microsoft, Cisco Systems Inc.,
Hewlett-Packard Co. and Intel Corp., still haven’t surpassed their
record highs from the 1990s and 2000.
"Investors are rotating out
of the risky or high-momentum stocks into safety, but they always do
that," Hickey concedes. He thinks an even safer choice is to sell all
stocks now and save the cash until the current turmoil settles down.
There
are other signs that the market may be overheating. One is the stampede
of startups trying to go public. Last year, 222 initial public
offerings were priced in the U.S., the most since 2000, according to the
research firm Renaissance Capital. The IPO pace so far this year has
more than doubled from 2013. In a sign that investors are becoming less
receptive to the market newcomers, the average return on this year’s
batch of IPOs has been 13 percent, down from last year’s average gain of
41 percent, according to Renaissance Capital.
The bubble worries
also escalated during the past two months after Facebook Inc. agreed to
pay $19 billion for mobile messaging service WhatsApp and then $2
billion for virtual reality device maker Oculus. WhatsApp has about 450
million users, but little revenue while Oculus hasn’t even released its
first product.
Facebook financed most of those deals with its own
stock, which had more than tripled in value since last summer. The stock
has retreated by nearly 20 percent in the past month.
"That’s one
of the reasons people are casting a questioning eye on the tech
sector," Kay says. "I think there is a lot of value being generated, but
also a lot of crazy stuff going on. We trust the market to sort it out
for us."
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Ortutay reported from New York.
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