Sometimes only a small pebble on the stock exchange to cause a landslide. On Monday, this little pebble came from report that Apple has cut production orders for the two new iPhone models – XS and XS Max. Although there is no official confirmation, the news has reached many investors and led them to sell huge amount of Apple shares, but negative moods moved to other major technology companies such as Facebook, Amazon or Netflix, which have lost more than 5% of their value.
The potential weakness in Apple’s iPhone sales fits into the image, which many investors now have for the technology industry. The big corporations, which over the years have reached gigantic proportions, have suffered repeated failures in recent weeks and months. Apple suffered from lower demand on iPhone, Facebook has been fighting for months with declining numbers of consumers in Europe and relatively disappointing business results. And the online streaming service Netflix has failed to win as many new subscribers as many investors have hoped for.
In addition, and beyond the five major FAANG shares (Facebook, Amazon, Apple, Netflix, and Google), there were other negative news: Nvidia was in a free fall for days because of weak prospects for Q4 2018.
The years of growth of the major American technology giants is over. Since the beginning of September, FAANG shares have depreciated sharply. For Facebook, Amazon and Netflix, the decline is about a quarter. For Apple’s and Google, the decreases are ultimately more than 15%.
In the summer, the situation was quite different. In early August Apple was the first company to reach a market value of 1 trillion USD. A month later, Amazon joined to the club. In just five years, the online retailer’s stock prices jumped more than five times, and it seemed like there was no limit on the way up.
But now doubts about this apparent infinite boom are getting stronger and stronger. On one hand, the overall economic situation has deteriorated to some extent. This is especially true for companies that are heavily dependent on the supply chain, such as the chip industry and consumer goods. On other hand, investors are increasingly wondering whether the technology giants really deserve the huge amounts traded on the stock market.
If we look at the so-called Price/Earnings ratio (P/E ratio), which is a general stock market index, it is clear that the high rates have high expectations that companies have yet to meet. At Amazon, for example, we have a ratio of 185 in 2017, which means that company needs 185 years to accumulate enough earnings to cover its share price. For Netflix, this figure was just under 150. For comparison, at the Deutsche Bond Index, Dax averaged over the last 30 years, the P/E amounted to 19 times.
High expectations for technology companies have become a problem, especially since the US Federal Reserve has started raising interest rates. For companies whose value is more in the future, rising interest rates are a particularly strong blow, because it will be more expensive for them in the future to generate high profits.
Since American corporations are already so large, every retreat in absolute terms is even more significant. For example, the 4% fall in Apple shares on Monday amounted to about 35 billion USD in market value: almost twice as much as Deutsche Bank’s entire market capitalization.
The example also shows that we need to be very careful with the messages of Apple and others. Because despite the last, sometimes huge drops, the technology giants are still too big. Since the beginning of the year, at least four of the five FAANG shares are still in the profit area, with the only exception being Facebook.
The technological boom has not yet ended. But perhaps more turbulent times await those companies that do not currently generate profits and owe their value to the pink scenarios for the future.