This has been a brutal March for the tech space with Technology Select Sector SPDR Fund (XLK - Free Report) losing about 5.3% in the last one month (as of Mar 27, 2018). While broad-based factors like Fed policy tightening and trade tensions kept Wall Street downbeat, technology-specific issues like Facebook (FB - Free Report) ’s data breaches, massacre with Nvidia’s self-driving car tests and issues in Twitter bruised big tech names (read: Is the Rout in Tech ETFs Transitory?).
Tech Behemoths That Fell from the Cliff
There was a bloodbath in the tech space. Facebook (down 16.3%), Twitter (TWTR - Free Report) (down 17.7%), Alphabet (GOOGL - Free Report) (down 11.7%), Netflix (NFLX - Free Report) (down 4.8%) and Amazon (AMZN - Free Report) (down 5.7%) have all lost heavily in the last 10 days (as of Mar 27, 2018). Notably, Netflix slipped 6% on Mar 27, marking its biggest decline in two years.
Inside the Factors That Hit Tech Stocks Hard
The soaring tech space hit a wall in mid-March on reports that Cambridge Analytica, a data firm associated with President Trump in the 2016 elections, unlawfully accessed 50 million Facebook user accounts in “one of its largest breaches yet.”
Wall Street was uncomfortable with the news that FB CEO Mark Zuckerberg “has decided to testify before Congress about his company's user data crisis.” Facebook has plunged 8.6% in the last five days and 14.6% in the last one month (as of Mar 27, 2018).
Nvidia’s Suspension of Self-Driving Car Tests
And now Nvidia (NVDA - Free Report) , one of the best performing semiconductor stocks in the S&P 500 over the past year, has tumbled 8% upon suspending self-driving car tests on public roads. The announcement came after a self-driving Uber car deploying Nvidia technology struck and killed a woman in Arizona.
Short-Selling of Twitter
According to CNBC, Citron Research's Andrew Left went for short-selling of the Twitter stock within less than two months of making a bullish call. Twitter tumbled 12% on the news on March 12. “The growing scrutiny surrounding social media and how companies handle users' personal information” led him to change his view so soon on Twitter.
Insane Valuation of Netflix to Correct Itself?
Netflix is probably getting crushed for its insane valuation. The stock is trading at a P/E (ttm) of 240.6x against the industry P/E of 25.8x. The forward P/E of the stock is now 110x against the 17.8x valuation of industry. The P/B ratio of the stock now stands at 36.4x versus the industry’s P/B of 4x. No wonder, amid the broad-based tech rout, Netflix stock may go for a correction.
Europe’s Revenue Tax on Digital Companies
The European Commission plans to target Silicon Valley’s tech titans with a renewed tax scheme. The bloc reportedly believes that tech companies contribute less than what these should to public funds. The EU estimated that an average effective tax rate of digital businesses is only 9.5% against 23.3% paid by traditional businesses.
The commission proposes to impose tax on sales to access some of the concealed profits the companies generate in EU states. “The present system of international corporate taxation — levied on declared profits rather than sales — has allowed tech companies to slip the net of a system designed for the pre-digital world,” per Financial Times.
Big Tech ETFs having considerable exposure to the aforementioned companies have traded in the red recently and maybe will remain subdued in the coming few days. Some of the downtrodden ETFs like AdvisorShares New Tech and Media ETF FNG lost about 5.4% on Mar 27, Global X Social Media ETF (SOCL - Free Report) was down 4.6%, ARK Web x.0 ETF (ARKW - Free Report) dropped 4.5%, PowerShares NASDAQ Internet ETF (PNQI - Free Report) shed about 3.9% on that day, iShares PHLX Semiconductor ETF (SOXX - Free Report) was down 3.7% on Mar 27 and iShares US Technology ETF (IYW - Free Report) retreated about 3.6%.
Investors can gain out of the situation with bear tech funds like Semiconductor Bear 3X Direxion SOXS (up 11.3% on Mar 27), Technology Bear 3X Direxion TECS (up 9.6%), Ultrashort Semiconductors Proshares SSG (up 8.1%) and Ultrashort Technology Proshares REW (up 7.6%).
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