Pricing Problem: Tech Companies' Market Values No Longer Reflect Their Risks

When anything becomes as pervasive as tech has, it no longer reacts to or reflects the market...it is the market.

The threat of regulation that could reign in some of the tech companies' abuses is long overdue, but it will affect margins as advantages like 'free' data and unfettered  growth are curtailed. JL

Dan Gallagher reports in the Wall Street Journal:

Tech stocks have been on a long winning streak on strong demand for hardware, software and services. But the sector’s growing clout over everyday life also raises the risks of what can go wrong. The Nasdaq Composite has spent the past month trading at a 28% premium to the S&P 500 as a multiple of forward earnings, compared with its three-year average of 22%. That is a sign that tech’s new risks haven’t been fully priced in.
The problem in tech isn’t demand. It’s everything else.

Such was illustrated well on Tuesday when a late-market selloff hit the technology sector particularly hard. The Nasdaq Composite slid nearly 3%—double the loss of the Dow. And the selling hit every segment, from internet companies to chip makers to software providers. Even Apple , AAPL -1.10% which kicked off the day with a cheery event designed to showcase new iPad and other offerings for the education market, shed 2.6% by the close.

But two names stood out among the rest—for different reasons. Nvidia ’s NVDA -1.85% shares fell nearly 8%, while Facebook FB 0.53% shed nearly 5%. In the case of Nvidia, the chip maker announced it was temporarily halting road tests of its driverless-car technology following a fatal crash involving an Uber vehicle. It isn’t clear if that vehicle was using Nvidia’s chip products, and these chips are just a small part of its business, but the news still cast a pall over the stock.
For Facebook, the selloff came on news that CEO Mark Zuckerberg will testify before Congress about the social network’s handling of user data. That would be an ignominious milestone for the 33-year-old billionaire, and raises fears about government regulation for the company.
Tech stocks have been on a long winning streak on strong demand for hardware, software and services. But the sector’s growing clout over everyday life also raises the risks of what can go wrong. The Nasdaq Composite has spent the past month trading at a 28% premium to the S&P 500 as a multiple of forward earnings, compared with its three-year average of 22%. That is a sign that tech’s new risks haven’t been fully priced in.