Tech stocks see worst sell off in over a year… but already rebounding
Technology stocks saw their worst sell off in more than a year this week, wiping some $60 billion off the sector. However, as dramatic as it was, fortunes are already reversing, with Thursday witnessing a rebound in Facebook, Amazon, Netflix and Google (the ‘FANG’ stocks that investors look to as a measure of the wider technology sector’s health). What drove this sell off? The answer is probably three things: tax reforms, net neutrality, and profit taking.
After a sudden fall, FANG stocks are already rebounding
SOURCE: Yahoo Finance
U.S. tax reforms mean that “lower growth and more U.S. intensive sectors will see an uptick in profits” according to a note from Dominion’s Ecommerce Fund Manager, Fred Baccanello. He states that: “tech companies will still benefit” but that they already pay less tax than other sectors – hence the market’s perception that they are the “losers” in the latest reforms, and money rotating into stocks that stand to benefit from them, like banks. But investors shouldn’t worry about tax driving further losses in tech. Baccanello points out that the readjustment is a “onetime event”, saying: “when the market has discounted it, they have discounted it.”
A more fundamental concern for tech companies involves recent plans by the Trump administration to strip back net neutrality. Net neutrality was once considered an unquestionable part of the internet, and vital to the proliferation of free information. In practice, net neutrality means that internet service providers (ISPs) have to treat all data on the internet the same: whether you’re streaming Netflix, reading a friend’s blog, or researching the fall of the Berlin Wall for a history assignment, the speed and quality of internet access shouldn’t be affected. Removing net neutrality risks small players’ ability to keep up with the sector titans – if ISPs start charging for a “premium” service, then company’s like Google and Netflix suddenly become much more difficult to disrupt.
For that same reason, though, investors into Ecommerce shouldn’t worry about net neutrality’s effect on the market (worries about freedom of information and the like are, of course, completely valid – although unlikely to impact your bottom line). Netflix’s CEO Reed Hastings explained, in very simple terms, why this wasn’t a problem for him earlier this year, saying: “[net neutrality is] not narrowly important to us because we’re big enough to get the deals we want.”
Ultimately, these twinned factors could well have acted as a spur for year-end profit taking, which Baccanello describes as “not unusual”. He also reassured investors that “the Ecommerce sector has consistently adjusted upwards” post-profit taking – something we are already beginning to see just a few days later.
If anything, with prices temporarily depressed, and “a 3-year forecast compound annual cashflow growth rate of 19% from Bloomberg Consensus Estimates” (Baccanello), now might be a great time to buy into Ecommerce Fund.
The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.
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