The Tech Bubble is Bursting

The stock prices of Google, Netflix, and Ebay each surged to record highs last week after all three companies released better than expected performance reports for the second quarter. Going by just those numbers, it would seem that the health of the tech sector is in great shape.
 
But a closer look at each of these companies reveals a very different story. And when you look at the other major players in the tech sector, the entire thing looks like a freshly painted house infested with termites. A strong gust of wind could blow it all down.
 
First up, Google. If you look at its earnings report, you have to read the footnotes. They’re like the fine print of the earnings report– and what they say is that as much as 3/4s of the company’s reported gains in income for Q2 can actually be attributed to a lower tax rate, not an increase in ad sales. So what once looked like growth of more than 9% now looks like growth of less than 3%. What’s more, when you look at its quarter-on-quarter growth, it has been slowing ever since 2011.
 
Netflix is the next pretender on the block. While it beat growth estimates for Q2, which sent the stock price through the roof, a closer look at the numbers makes it clear that the company is barely profitable and has now moved from overvalued to extremely overvalued. With an operating margin of 6.9% and quarterly growth of more than 23%, it appears to be a good buy– but the majority of the company’s growth is now coming from foreign subscribers and new markets are rapidly dwindling. Spending for the company has also spiraled out of control, with more than $220 million in outflows for Q2.
 
The truth is that Netflix’s current P/E ratio is a colossal 211. That would mean a stock price of $50 a share would be an overvaluation. It is currently trading at more than TWICE that.
 
For the 1st quarter of this year Netflix expected profits of $0.63 per share. It only hit $0.36. For Q2, Netflix was hoping to hit $0.86 per share but only reached $0.30. While they’ve been able to consistently increase their subscriber base month on month, spending has continually increased while profit estimates have continually missed the mark. Analysts are now slashing estimates for the company for the next three years.
 
Ebay’s stocks also took off last week after the company ended its long-term partnership with PayPal. While many investors interpreted this move as a much-needed house cleaning and streamlining to indicate what could be leaner, brighter days ahead, the company is essentially giving up on its own integrated payment processing platform and cutting thousands of jobs.
 
As we have mentioned before, one of the biggest threats to the tech sector, and stock market as a whole, is hype. The perfect example of this is Twitter, a company that was initially valued at more than $14 billion. Twitter is expected to release its Q2 earnings next week. Going by its Q1 earnings, unless some sort of miracle has happened, investors shouldn’t get their hopes up. After more than 9 years, the company has yet to turn a profit and little has changed in recent months. If you’re a shareholder wondering what to expect that day, when the company revealed its Q1 earnings, shares fell by nearly a third.
 
Facebook is another tech giant due to reveal its Q2 earnings next week. Its stock price hit an all-time high today at 99.24/share. To give you some perspective on the absurd level of overvaluation in the tech sector, you need to look no further than Facebook, a company that doesn’t actually make anything, that now holds more market value than General Electric.
 
This week, Microsoft, IBM, and Yahoo also released their quarterly earnings, all of which were disappointing. It sent the market tumbling more than 200 points today, before finally rebounding a bit to close down 181.
 
But the real meat of the tech sector and, truthfully the entire market, is of course Apple. Apple’s performance over the past 2 years has mirrored the macro performance of the S&P 500. When AAPL went up, the entire market went up. When it went down, the entire market followed.
 
Well, if you have your money in a 401k, you might be interested to know that the company just issued a report on their quarterly performance tonight during after-hours trading. It is a critical reveal that indicates not only how well the Apple Watch has been selling but also the degree of success that Apple has been experiencing in China.
 
While the company reported a decline in iPad sales and slowing iPhone adoption, the gist of the entire report can be summed up with one simple detail: they didn’t even mention Apple Watch sales numbers.

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