Once-soaring tech stocks now sinking

Associated Press

SAN FRANCISCO

The stock market’s laws of gravity are ravaging its highest fliers.

Just look at the list of technology trailblazers whose values have plummeted from record highs during the past few weeks. Investors have refocused on safer sectors such as utilities, health care and consumer staples instead of companies that promise potential growth from online services that are building huge audiences.

Stung by the abrupt change in sentiment, the stocks of recent stars such as Netflix, Facebook, Twitter and LinkedIn are 20 percent to 45 percent below their recent peaks. The steep downfall is raising questions about whether this is just a fleeting fit of fickleness or the foreshadowing of another market bubble about to burst.

The tech-driven Nasdaq composite index closed at nearly 4,358 early last month, its highest level since the 2000 peak, and has shed nearly 360 points, or 8 percent, since then.

Optimists expect a rebound. They point out that technology remains a bright spot in an otherwise dreary economy as software, computers, mobile devices and the Internet fill increasingly instrumental roles in work, entertainment and communications.

“Tech is where the action is,” says longtime industry analyst Roger Kay.

Pessimists view the tech sector as Ground Zero for a long-overdue reckoning. They say the stock market that has been pumped up by the flood of money that the Federal Reserve has funneled into the long-term bond market since the financial meltdown of 2008 decimated the economy. Now that those government-backed bond purchases are tapering off, people are starting to realize “the only thing holding this balloon up is the Fed blowing air in it,” said Fred Hickey, editor of The High-Tech Strategist newsletter.

That’s why he believes investors are parachuting from stocks that had soared to dizzying heights in a short period of time.

Internet-video subscription service Netflix Inc., for instance, nearly quadrupled in value last year to top the charts of the bellwether Standard & Poor’s 500 index. The company was worth $27 billion by the time its stock peaked at $458 early last month. At that price, investors were paying the equivalent of $117 for every $1 of Netflix’s projected earnings. Investors were betting Netflix will become increasingly prosperous as the number of U.S. subscribers to its $8-per-month video-steaming services swells from 33 million at the end of last year to management’s long-term hopes for 90 million.

Even Netflix CEO Reed Hastings cited the “euphoria” surrounding the stock as he discussed the company’s quarterly earnings last October. “We have a sense of momentum, investors driving the stock price more than we might normally,” Hastings said in a video presentation. “There’s not a lot we can do about it.”

Netflix’s stock closed Friday at $326.17, nearly 30 percent below its peak.

Another mind-boggling run-up occurred after short-messaging service Twitter Inc. priced its initial public offering at $26 per share in November. By late last year, Twitter’s stock had more than doubled to a peak of $74.73. At that level, Twitter boasted a market value of roughly $50 billion, even though the San Francisco company has never turned a profit in its eight-year history. The stock lost nearly half its value as it tumbled down to about $40. That still leaves Twitter with a market value of about $28 billion.

“It’s the most insane pricing I have seen since 2000,” Hickey says of technology stock prices.