Market currents

A different kind of tech bubble just burst

By September 20, 2019 No Comments

The market is crashing and the tech bubble has burst. It’s just not the one you’ve been paying attention to. Over the last year, a few select technology stocks have been the best-performing stocks in the entire stock market. But recently, these stocks have come crashing down. Take a look at the recent declines in some high flying technology stocks:

Roku (ROKU), down 37% in the last three weeks

The Trade Desk (TTD), down 30% in the last two months

PagerDuty (PD), down 51% in the last four months

Zscaler (ZS), down 42% in the last two months

Uber Technologies (UBER), down 32% in the last two months

MongoDB (MDB), down 29% in the last three months

Smartsheet (SMAR), down 28% in the last two months

Twilio (TWLO), down 25% in the last 2 months

Zoom Video (ZM), down 23% in the last 3 months

Shopify (SHOP), down 22% in the last four weeks

The tech bubble burst

What caused these stocks to drop?

There has been a momentous shift in investor sentiment. These stocks, which could do no wrong in the eyes of investors as recently as 3 months ago, have all seen declines of 20% or more. It’s hard to pinpoint exactly what the catalyst was for this sentiment shift. However, one event did occur around the time all of these stocks topped out: Salesforce bought Tableau Software

Salesforce announced their acquisition of Tableau on June 10, 2019. That same month marks the all-time high for Twilio, Pagerduty, MongoDB, Zoom Video, and Uber. The acquisition, coincidentally or not, seems to have represented a climax in valuation for these high flying technology stocks. It was almost as if the market looked around and said, “Why didn’t you buy out my stock? And if you’re not going to, who else is?” In other words, what Salesforce paid for Tableau may have put a ceiling on the valuation of other fast-growing technology stocks. 

ETFs can lower your risk

The stock price of richly valued companies, especially those of young and trendy stocks like the ones above, can be reliant on greater fool theory. If the market deems that there are no more fools, the adjustment in share price can be dramatic. Now, I wouldn’t expect all of these stocks to keep dropping. In fact, I’m sure some of them will prove to be excellent investments. 

If I had to pick one to bet on, it would be Twilio. The reason is Twilio has the longest history as a publicly-traded company and has not been as volatile as the other stocks. But there are safer ways to bet on these types of stocks. I’d recommend an ETF like Global X’s cloud computing fund (CLOU) for those who want exposure to risky technology stocks like these. 

CLOU topped out in July but is only down 12% from its high. That’s still a steep loss vs the broader stock market, but it’s a lot less than the individual stocks themselves. ETFs are a great way to bet on broader market themes with less risk. Everyone loves to own the hot stocks when they’re going up. But the potential for a 30% drop in just a few weeks should be a fresh reminder to control your risk. 

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