Bubble anxiety

Fully Charged

Hello, this is Jeran on Bloomberg's equities team. Tesla Inc.'s stock had its worst day ever on Tuesday, with shares tumbling 21%. The dip was so dramatic that it personally cost Elon Musk more than $16 billion—the largest swing in net worth ever recorded by the Bloomberg Billionaires Index.

And Tesla wasn't alone. On Tuesday, tech stocks fell for their third consecutive day, amid jitters that pandemic-era valuations had gotten too high, too fast. Slack Technologies Inc. didn't help matters after a billings miss sent the stock down more than 19% in after-hours trading.

Some of the biggest winners so far this year have seen the most dramatic reversals in recent days. Zoom Video Communications Inc., which has racked up new work-from-home customers and seen its stock price soar, has fallen 23% in the past four days. Apple is down 16% over the same period. The Nasdaq 100 is now off 11% from its Sept. 2 peak.

There are a few popular explanations for the rout, some more plausible than others. One factor may be an unwinding tied to aggressive option bets adopted by retail investors. Some have pointed to SoftBank Group Corp.'s role as the "Nasdaq Whale," though the company's part in bidding up tech stocks may be overblown.

But perhaps the most salient explanation is that the dip was long overdue after such a wild rally. Now, the market is just blowing off some of the speculative froth.

While the latest downdraft has been powerful, tech stocks are still having a banner 2020. Even after Tuesday's declines, the best performers on the Nasdaq so far this year are still up triple digits. Zoom has climbed 416%, Tesla soared 295% and DocuSign Inc. is up 177%. Companies like Nvidia Corp. (up 103%) and Advanced Micro Devices Inc. (up 72%) have also fared exceptionally well during the pandemic. 

Even though the larger economy looks shaky, tech's recent gains aren't a signal that we're headed for a dotcom-style crash. In 1999, note Bloomberg Intelligence Analysts Jitendra Waral and April Kim, Amazon.com Inc. was trading at more than 45 times sales. Over the past decade, that multiple has been closer to three. "Current high valuations for tech may reduce future returns, but we are still a galaxy away from 1999," the analysts wrote.

Of course, there have been lots of signs that tech stock prices got a little detached from reality. For example, Apple's price to estimated earnings ratio has climbed above 35, the highest in at least three years. Its price to current earnings is at the highest since 2008, back when revenue growth was soaring thanks to the iPhone.

The bottom line may be that these companies have attracted a greater share of investor dollars for a reason: Their businesses are benefiting from the pandemic and an accelerated shift to the digital realm. Many tech companies (especially the biggest ones) are highly profitable, have strong balance sheets and are sitting on huge piles of cash.

Now, it's just a matter of what investors are willing to pay for those future profits. At the moment, the answer seems to be: a lot. Jeran Wittenstein

If you read one thing

Apple is expected to unveil a new watch at an online event on Sept. 15, Bloomberg's Mark Gurman reports. In other Apple news, the company has escalated its feud with the Epic Games, countersuing the game maker to stop it from using its own payment system for Fortnite. 

And here's what you need to know in global technology news

SoftBank's Chief Compliance Officer, Chad Fentress, has left the company. He's also out at the WeWork board as of last week. His WeWork replacement will be Michel Combes, a former chief executive officer of Sprint. SoftBank has not announced a replacement for Fentress in his compliance role. 

The creator of the classic video game Civilization talks about his new memoir, his career, and why he didn't think about putting a pandemic into a video game. The book was released on Tuesday. 

The U.S.-China showdown over big data is likely to have a legacy that lasts for decades

GPT-3 keeps writing articles about itself


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