Plenty of tech stocks are seeing major losses as equity markets tumble amid worries about the coronavirus outbreak’s spread beyond China.
However, given how large the drops seen over the last two trading days have been, the selloff might have as much to do with profit-taking following a period of considerable multiple expansion as it does with justified coronavirus concerns.
As of the time of this article, the Nasdaq is down 5.3% from its Thursday close, compared with a 4.2% drop for the S&P 500. And quite a few tech names have seen declines of 8% or more.
Chip developers and equipment makers — a group of companies that have a lot of coronavirus exposure, given the outbreak’s impact on both Chinese manufacturing and demand — have collectively been hard-hit. Names seeing big declines include Nvidia (NVDA) – Get Report (down 11% from Thursday’s close), AMD (AMD) – Get Report (down 15%) Applied Materials (AMAT) – Get Report (down 8%) and STMicroelectronics (STM) – Get Report (down 9%).
But enterprise software firms — a group featuring many names that get little or no revenue from China — have also seen a lot of selling pressure. Okta (OKTA) – Get Report is down 10% from Thursday’s close; MongoDB (MDB) – Get Report and Alteryx (AYX) – Get Report are down 14%; and CrowdStrike (CRWD) – Get Report is down 13%.
Likewise, tech giants have also fallen sharply. Apple (AAPL) – Get Report, which issued a coronavirus-related sales warning last week, is down 6% from Thursday’s close. However, Alphabet (GOOGL) – Get Report and Facebook (FB) – Get Report, whose services are largely blocked in China, have each dropped 6% as well. Microsoft (MSFT) – Get Report, which cautioned in January that the coronavirus outbreak could affect its Windows revenue, has fallen 7%.
As many readers are likely aware, a lot of these names have posted big gains since the market’s late-2018 swoon. Apple, Nvidia, Applied Materials, STMicro, Okta, MongoDB all more than doubled from their late-2018 and early-2019 lows to their recent highs, while AMD and Alteryx more than tripled.
And these big gains have often been accompanied by significant multiple expansion. Whereas many chip stocks sported dirt-cheap valuations in late 2018, it hasn’t been hard lately to find forward P/E ratios north of 20 within the group.
Meanwhile, quite a few high-growth software names have come to carry enterprise values that are equal to more than 10 times forward billings estimates (forward sales multiples are higher still).
Against such a backdrop of large paper profits and elevated valuations, the arrival of bad macro news can trigger profit-taking that might feel disproportionate relative to the impact of the news on future profits.
Nvidia, Apple, Alphabet, Facebook and Microsoft are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.