AAPL Apple Inc

By Akane Otani and Michael Wursthorn 

Investors rushed out of the biggest names in the technology industry Monday, the latest sign that scrutiny from lawmakers and regulators, backlash from consumers, and flagging share performance is threatening to undermine their dominance in the stock market.

Monday's selling extended a streak of rough trading for the technology sector, which after leading the stock market higher for much of the past year has tumbled as negative news surrounding the industry's giants has snowballed since mid-March.

The tech-heavy Nasdaq Composite, which last set a record close just three weeks ago, gave up its gains for the year Monday, sliding 2.8% and underperforming the Dow Jones Industrial Average and S&P 500, both of which were on track for their lowest closes of the year.

Facebook Inc., which kicked off the sector downturn last month amid criticism of its handling of users' data, fell 2.8% Monday, deepening declines after its biggest one-quarter percentage loss since 2016. The company, which has lost about $83 billion in market value since mid-March, has been slammed by former company executives, as well as Silicon Valley rivals including Apple Inc. CEO Tim Cook.

Amazon.com Inc. also came under further pressure, shedding 4.7%, following tweets from President Donald Trump on Monday and over the weekend that attacked the company's business practices. And Tesla Inc., which faced rebukes from the National Transportation Safety Board over the disclosures it made about a fatal crash involving one of its vehicles and its semiautonomous driving system, slipped 4.2%.

All together, the so-called FAANG stocks -- Facebook, Apple, Amazon, Netflix Inc. and Google parent Alphabet Inc. -- have lost roughly $324 billion in market capitalization since March 16, before Facebook revealed a third-party firm with ties to the Trump administration had improperly kept its users' data for years. The growing scrutiny around stalwart technology names has raised fears among investors of tighter regulations that could take aim at the most valuable commodity for many of the companies -- users' data.

"Whenever you think there's some relief in sight, we get some political noise that comes out and it spooks the entire technology sector," said Mohit Bajaj, director of ETF trading solutions at brokerage WallachBeth Capital.

Many investors remain optimistic about the technology industry's growth potential. Technology companies in the S&P 500 are expected to post year-over-year earnings growth of 22% in the first quarter, according to FactSet, eclipsing the broader S&P 500's expected 17% earnings growth rate and building on a strong fourth quarter.

Many of the companies under the biggest scrutiny have also delivered a strong track record of sales, with the holiday season pushing Amazon's last quarterly profit above $1 billion for the first time, and sales of Apple's flagship iPhone product helping the firm post its best quarterly revenue and profit ever last quarter.

Now, the question is whether impressive growth will be enough for investors who are questioning whether the technology sector's run has been overdone. Facebook is down 12% for the year following a 53% surge in 2017, while Apple is down 1.4% after a 46% run in 2017 and Alphabet is down 4.3% after rising 33% last year.

Strong earnings, along with a sharp pullback in stock prices, has made valuations of tech companies more attractive, analysts said. Tech firms in the S&P 500 trade at roughly 18 times their forward-looking earnings over the next 12 months, down from 20 times in late January, according to FactSet. Consumer discretionary stocks have contracted too, falling to 20 times future earnings from 23. Amazon and Netflix sit in the consumer discretionary sector of the S&P 500.

"In general tech is still growing earnings at an incredible pace, and we've created lots of opportunity for buyers," said Art Hogan, managing director and chief market strategist at B. Riley FBR.

Still, tech and consumer discretionary stocks are relatively expensive compared with other pockets of the market: The S&P 500 is trading at 16 times future-earnings growth, while financial stocks in the S&P 500 are trading at just 13 times forward-looking earnings, a relative bargain among investors who believe the longer-term trend of rising interest rates will boost lenders' profitability.

Growing share repurchases could help technology stocks recoup their losses. Tech firms last year spent $118.8 billion on share buybacks, which represented about 23% of all share buybacks in the S&P 500 in 2017 and was second only to share repurchases among financial firms, according to S&P Dow Jones Indices.

Buybacks can make stocks look more attractive to investors by decreasing the number of outstanding shares on the market and pushing up per-share earnings.

Yet many analysts caution that volatility in technology names is likely to persist, with no easy solutions in sight yet for many of the issues that companies are facing. In one sign of traders bracing for further rockiness, the Cboe Nasdaq 100 Volatility Index, which measures expectations for swings in the Nasdaq 100 over the next 30 days, jumped 15% Monday, adding to a 96% advance for the year.

"This tech wreck is not a new story. But we've gotten a crescendo of bad news, and it seems like this one is lingering longer because we've had more questions crop up that haven't been answered yet," Mr. Hogan said.

Write to Akane Otani at akane.otani@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

April 02, 2018 13:33 ET (17:33 GMT)

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