Several tech stocks declined significantly on September 27, 2019. The market and investors were spooked in the second half of Friday. Bloomberg’s report on the Trump administration looking to limit investments in China sent several stocks lower.
The broader markets are expected to remain volatile heading into the last quarter of 2019. The trade war concerns have persisted throughout the year. So have recession fears and indications that the global economy is slowing.
But the Dow Jones and the S&P 500 Indexes have continued to march towards all-time highs. The Dow Jones is up over 15% while the S&P 500 has gained 18% year-to-date. Now, in addition to the recent report on China investments hurting stocks, investors also have to consider the impact of President’s Donald Trump impeachment proceedings.
Further, global growth continues to remain sluggish as seen by Europe’s grim economic data. Even if Donald Trump does not aggressively pursue limiting investments in China there are far too many uncertainties that will impact investors.
Tech stocks were decimated in the last quarter of 2018
Investors experienced a massive erosion in wealth during the last quarter of 2018. Several tech stocks including Apple (AAPL), Amazon (AMZN) and Netflix (NFLX) were trading close to all-time highs. AAPL stock fell over 30% while AMZN and Netflix declined 25% and 30% respectively in Q4 of CY 2018.
Stocks were then impacted by the trade war between two of the largest world economies. There were concerns over a slowdown as several companies reported results and guidance below Wall Street estimates.
As we have stated above, the trade war and slowdown fears remain. The Trump impeachment and the President’s aggressive approach for a trade deal should make investors cautious, if not worried.
FactSet data about tech stocks is worrying
According to this FactSet report, 82 out of 133 companies in the S&P 500 have issued negative EPS guidance for the September quarter. This is higher than the 5-year average of 74 for the third quarter of 2019.
Tech stocks will lead these earnings decline with as much as 29 companies expected to experience an erosion in the bottom line. FactSet confirmed that nine semiconductor companies and seven software companies in the S&P 500 have issued negative guidance.
We have already seen how Micron’s market value declined over 10% after it announced quarterly results last week. Micron’s poor guidance resulted in a decline for semiconductor peers as well.
Though semiconductor stocks have made a strong comeback in CY 2019, they have just recovered investor losses in the last year.
Several semiconductor stocks are still trading well below all-time highs and investors can expect a pullback in Q4 as well, as the downturn is likely to persist.
High growth tech stocks most vulnerable
In the last month, we saw how shares of NetApp (NTAP) and DXC Corp. (DXC) plummeted over 20% in a single trading session. Both companies attributed lower tech spending to their tepid guidance which was well below Wall Street estimates. Now, software stocks are also expected to experience a slowdown.
Overvalued tech stocks like Alteryx (AYX), The Trade Desk (TTD), Splunk (SPLK), Roku (ROKU), Shopify (SHOP), Twilio (TWLO) and many others are trading well below their 52-week high. These tech stocks have lost close to 30% (some even more) of market value in September as investors were wary about high valuations.
Roku is also grappling with increased competition in the streaming device segment. Despite the recent pullback, the above-mentioned high growth tech stocks have easily outperformed broader markets. This might lead to a continued downward spiral if they issue tepid guidance or miss estimates.
Netflix most vulnerable among FAANGs
Apple shares have led FAANG gains in 2019. FAANG includes companies such as Facebook (FB), Apple, Amazon, Netflix, and Google. Netflix has underperformed FAANGs in 2019 and might decline further in Q4.
Earlier this month, Netflix CEO Reed Hastings admitted that competition from Disney+ and Apple TV+ pose a real threat. It will be interesting to see how Netflix guidance will be impacted going forward.
Apple investors, on the other hand, might not be impacted too badly. The company is experiencing strong demand for its latest line up of iPhones. It has the potential to have two consecutive years of solid iPhone growth as a 5G device will mostly be launched in 2020.
Apple will also benefit from diversifying its revenue base as it has entered the online subscription market as well as the gaming subscription market in recent times.
The FactSet data has provided a peek into company expectations in the third quarter of 2019. Now, it is time for investors to wait and watch. Will we have a bloodbath similar to last year?