Facebook’s plunge shatters faith in tech firms’ stock market invulnerability

[能田]

                                               (World Today Friday 27 July 2018)

 Facebook’s plunge shatters faith in tech firms’ stock market invulnerability

The sudden drop in Facebook's share price amounts to a test of the giant, technology-focused stocks

that have carried the market for much of the year.  Reuters file photos

Updated 27 July, 2018

NEW YORK — It had become an article of investor faith on Wall Street and in Silicon Valley: Quarter after quarter, year after year, the world’s biggest technology companies would keep raking in new users and ever-higher revenue. 

And with that, their share prices would continue to march upward, sloughing off any stumbles.

This week, that myth was shattered. And investors responded Thursday by hammering the stock of Facebook, one of the world’s most valuable companies.

Shares of the social media giant fell 19 per cent, wiping out roughly US$120 billion (S$163.6 billion) of shareholder wealth, among the largest one-day destruction of market value that a company has ever suffered.

Investors dumped Facebook shares after the company reported disappointing second-quarter earnings, in which the company warned of a sharp slowdown in sales growth in coming quarters along with rising spending on security and privacy enhancements.

The sudden drop also amounted to a test of the giant, technology-focused stocks that have carried the market for much of the year.

Before Facebook’s tumble, more than half the returns in the Standard & Poor’s 500 index this year had been provided by just a handful of technology-related stocks, said Ms Savita Subramanian, an equity strategist at Bank of America Merrill Lynch.

In recent years, investors — from individual traders to the world’s largest hedge funds — have snapped up shares in these companies, which include Facebook, Amazon, Apple and Google’s parent company, Alphabet. 

These tech giants were viewed as having nearly unassailable revenue streams that could deliver profit growth regardless of economic conditions.

As a result, their share prices soared. 

This year alone Apple is up some 15 per cent; Alphabet has gained more than 20 per cent; Amazon has surged more than 50 per cent; and Netflix is up nearly 90 per cent.

Facebook’s stumble suggests that some of these stocks — as well as the broader market — could be particularly vulnerable if their financial results don’t live up to investor expectations.

Until Thursday, Facebook was enjoying enormous gains. The stock was up more than 23 per cent for the year, before it reported earnings after Wednesday’s close.

By Thursday afternoon, all its gains for the year had vanished.

It was the details of Facebook’s report that seemed to spook investors. The company’s quarterly revenue fell slightly short of meeting the expectations of Wall Street analysts.

And executives warned that the company would invest heavily in privacy and security, and that revenue growth would most likely slow in coming quarters.

Still, Facebook’s sharp drop seems to have had a limited effect on the broader market, which has shown signs of gaining traction in recent weeks as companies largely reported strong second-quarter earnings.

On Thursday, the S&P 500 was down only slightly despite Facebook’s tumble. 

Other large tech companies didn’t take any cues from Facebook: Alphabet shares rose 0.8 per cent and Apple slipped only 0.3 per cent. Amazon fell 3 per cent, but recovered those losses after hours Thursday after issuing a strong quarterly earnings report.

The S&P 500 fell just 0.3 per cent Thursday, to 2,837.44, while the Dow Jones industrial average rose 0.4 per cent to 25,527.07.

The tech-heavy Nasdaq composite index was the hardest hit by Facebook’s tumble, dropping 1 per cent to 7,852.18.

The S&P 500 is up more than 6 per cent this year despite trade tensions surrounding the United States and its largest trading partners and the Federal Reserve’s increases in interest rates.

The index ended Thursday only about 1 per cent below its high hit on Jan. 26.

“The market is looking ahead,” said Mr Jeffrey Rubin, director of research at stock market information firm Birinyi Associates. “There are always going to be these one-day disasters.”

It’s quite possible that Facebook’s shares could recover and continue to climb.

In March, the company’s handling of user data in the Cambridge Analytica scandal contributed to a backlash against the size and reach of the biggest tech businesses and raised concerns that regulators may soon crack down on these companies. 

Shares of Facebook fell 17 per cent in the days after news broke. By May, the company had erased those losses.

Still, the sheer size of Facebook’s fall on Thursday became a focus for investors.

The decline in Facebook’s market value was roughly equivalent to the entire value of some of the best-known companies in the US, including McDonald’s, Nike and industrial conglomerate 3M.

There are few examples of single-day losses so large. In September 2000, as the tech stock boom turned to bust, chipmaker Intel warned that its sales could slow, sending its stock price down more than 20 per cent. 

The rout knocked US$91 billion off its market value in a day. Adjusted for inflation, that loss would be more than $130 billion in 2018 dollars, greater than the value Facebook lost Thursday.

But given the vast market value of today’s tech giants, and the fact that 20 per cent declines in share prices are not unheard-of, the size of the losses shouldn’t be surprising.

Apple is now worth more than than US$950 billion. Amazon, Alphabet and Microsoft are not far behind, with market values of more than US$800 billion.

And even after the drop Thursday, Facebook is the fifth-largest publicly traded company, by market value, at more than US$500 billion. NEW YORK TIMES

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