Credit: Mai Le/Wikipedia

Are the tech giants over-rated?

Twitter leads a rapid fall in Silicon Valley stocks, as CEO Jack Dorsey tries to unclip its wings.

by Adam Gale
Last Updated: 29 Mar 2016

If you invested your life savings in US tech stock and haven’t checked the markets since Christmas, you might want to look away now. Shares have been falling across the board, with Microsoft, Amazon, Alphabet (Google), Facebook and Apple all losing between 7% and 14% of their value since the New Year. In the same time, Twitter is down 19% and GoPro 31%.

Is tech in crisis then? Not so fast. For a start, the fall in tech stocks is broadly mirrored by the major indices – the FTSE 100, Dow Jones Industrial Average and Nasdaq 100 have all lost between 6% and 9% in the same period, as the Chinese downturn, European stagnation and American interest rate hikes give investors the jitters.

Indeed, since mid-October, four of five tech giants about which MT regularly writes have substantially outperformed the markets (sorry Apple), making talk of a tech rout premature at best.

The performance of Amazon, Apple, Alphabet/Google and Twitter over the last three months, compared to the Nasdaq. Facebook and Microsoft have also outperformed the index. Credit: Yahoo Finance  

This illustrates the danger of terms like ‘tech firms’ and ‘the tech sector’. These are a convenient way of grouping companies that are known for high levels of technological innovation, but they miss the huge diversity of these companies. Despite some overlap, they operate in different markets, have different business models and very different financials

Apple and Amazon for instance have been the worst performers in recent weeks among the big players, but for entirely different reasons – the former because Chinese consumer demand is increasingly significant to its future revenues and the latter because it always puts growth over profits. By definition that makes it a speculative investment, which makes it more vulnerable to volatility - when investors are worried, they tend to flee to stocks with safer (or indeed, any) dividends.  In neither case, however, are the companies themselves in any sort of real trouble.

Twitter’s in a flap

The same is even true for big fallers Twitter and Netflix, albeit to a lesser extent. Netflix dropped because it missed expectations on subscriber growth, but it’s still growing. Twitter makes a small profit (if you ignore stock option payments, which put it at a persistent technical loss) but is struggling to grow.

Its real problem is that people use Twitter because it’s quick and simple, but that’s not very helpful if you want to find ways of making money out of them. Co-founder and returning CEO Jack Dorsey is attempting to monetise it by making it more complex, but that strategy only appears to be driving new users away.

Dorsey has opened Twitter’s API to outside developers (better late than never), fired 8% of its staff (but gave the rest of them some of his own stock) and is rumoured to be considering extending the 140-character limit (a sign of desperation if ever there was one). None of that seems to be jump-starting the social network’s disappointing user numbers, which is why Twitter stock has lost 63% of its value since April – half of which since Dorsey returned in October.

In the end, tech businesses aren’t so different to other businesses. No matter how popular (or not) they are, it all comes down to the numbers in the end.

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