- The shares of major tech companies were performing exceptionally well earlier this year, but those gains got nearly erased on Monday.
- Overvaluation, the U.S.-China trade war and recent privacy concerns surrounding tech companies are among the reasons for the drops.
- Apple and Facebook have been hit the hardest in recent weeks, thanks in part to a few major reports from news outlets.
Major tech stocks got pummeled by a major sell-off on Monday, nearly erasing all 2018 gains, and continuing a trend that’s weighed down the sector since October.
Since October 3, the so-called FAANG companies—Facebook, Apple, Amazon, Netflix and Google (Alphabet)—have lost a combined $728 billion in market value. Apple has been hit the hardest in recent weeks, as these figures on market loss show:
- Apple: $231.06 billion
- Amazon: $220.67 billion
- Google: $138.22 billion
- Facebook: $89.95 billion
- Netflix: $48.11 billion
The tech giants had been flying high throughout most of the year, seeing bullish investor sentiment and growth that outpaced earnings forecasts. But Monday’s drop nearly erased all the gains for 2018, plunging the market deeper into correction territory.
These drops have major implications for the broader economy, mainly because retail investors have in recent years purchased about two-thirds of major tech stocks, in the form of traditional mutual funds, exchange-traded funds and direct ownership.
Why are tech stocks dropping?
The United States’ increasingly tense trade relations with China, which hosts the supply chains of many American tech companies, isn’t helping to improve skittish investor sentiment. Those anxieties probably worsened over the weekend when Vice President Mike Pence, speaking at the Asia Pacific Economic Cooperation (APEC) summit, signaled there’d be no budging on his side of the escalating trade war.
“The United States, though, will not change course until China changes its ways,” Pence said.
It’s also likely that President Donald Trump’s “America First” policies are causing other economies to hike up tax rates on tech companies.
“Because of President Trump’s international commercial protective nationalistic battle, all other large economies are insisting that the tech giants will pay their fair share of tax,” Radu Tunaru, a professor of finance at the University of Kent, told The Street. “Hence, technology company stockholders are looking at a reduction in future revenues plus possible large fines for the past behavior of these companies.”
Trump’s tax cuts
The Trump administration cut the corporate tax rate to 21% and also persuaded corporations, including Apple, to repatriate billions in overseas cash at a lower tax rate of 15.5%.
But, as The Streetreports, this deal could prove misleading to investors.
“The bill can be paid over a period of eight years, on an adjusted schedule that shifts 45% of the liability to the last two years. Although companies have the option of paying it in a lump sum, “substantially all” corporations studied in the report — including Apple, which has the largest tax liability by a wide margin — opted for the 8-year repayment plan because there’s no interest associated with the liability, said Moody’s David Gonzales.”
Gonzalez told The Street the deal might not present investors with all pieces of the puzzle.
“Disclosures that we have reviewed to date indicate that tax liabilities relating to unrepatriated overseas earnings can be a significant drain on reported operating cash flows in future years,” he said. “Investors should scrutinize income tax disclosures because the notes to financial statements may not contain all of the pieces to a company’s income tax puzzle.”
Facebook continues to suffer negative publicity over data privacy concerns, intercompany drama and its dishonest handling of knowledge that Russian entities were trying to influence U.S. politics.
Last week, a lengthy New York Times report outlined the misleading ways in which the social media company has handled numerous scandals in recent years, including omitting key information about Russian interference to lawmakers and the public, and also hiring a public relations firm to drum up negative press about its rivals in an attempt to draw the spotlight off itself.
On Monday, the Wall Street Journal published a report detailing how CEO Mark Zuckerberg had blamed second-in-command Sheryl Sandberg and her teams for the public fallout from Cambridge Analytica, the firm that accessed millions of Facebook users data. Zuckerberg also reportedly told executives earlier this year that his company was “at war.”
More broadly, Facebook is losing its youngest users as they migrate to more visual-based apps like Snapchat.
Shares of Apple dropped 4% after the Wall Street Journal published a report showing how the company had slashed production for iPhones in 2018. According to the Journal, sales of Apple’s lower-priced iPhone XR have been especially disappointing, leading the company to cut production by more than 20 million units. Apple shares fell 4% on Monday.