Is recent volatility among tech stocks cause for concern?

Much has been made of the recent sell-off in U.S. tech stocks. It is true that some of the largest companies by market capitalisation dropped significantly over a two-day period[1]:
Chris gannatti
Chris Gannatti

  • Apple dropped by almost 8%
  • Microsoft dropped by more than 7.5%
    ,li> Amazon dropped by more than 6.7%

    This generated attention because it was largely these stocks that had been responsible for propelling many of the various benchmark indices towards record highs after the Covid-19 induced market lows of 23 March 2020. Apple had been in the headlines recently for achieving a market capitalisation greater than $2 trillion USD — the first company to ever do so.

    The fact of the matter is that many tech companies have been delivering strong results relative to expectations. In cloud computing, for example, as many have been forced to work-from-home for significant periods of time, many software-as-a-service companies have been delivering incredible year-over-year revenue growth. Zoom Video Communications—emblematic of a company designed to help remote works and families stay in contact—delivered 355% year-over-year growth in revenues for the period ended 30 June 2020.

    Pre-pandemic, Zoom Video Communications began 2020 with a market capitalisation of about $18.8 billion USD. As of 4 September 2020, this figure was more than $100 billion USD[2], and the share price had rallied more than 400%. While it is difficult to find similarly mainstream companies that have delivered numbers on par with Zoom’s, there are numerous software-focused cloud companies that have delivered returns north of 100% in 2020[3], some examples of which are:

  • Fastly—303%
  • Docusign—192%
  • Zscaler—189%
  • Crowdstrike—151%
  • Shopify—145%

    Each of these companies has reported strong growth in year-over-year revenues as of its most recent earnings announcement. However, the problem that creeps up when returns are already this strong is that it is going to be harder and harder to continually beat expectations. It’s also notable that Fastly, for example has a market capitalisation of $8.5 billion USD and Zscaler has a market capitalisation of $17.5 billion USD. This tells us that companies like these may also be susceptible to general market movements—up or down—with a great deal of sensitivity.

    The Covid-19 pandemic is still ongoing and 2020 will go down in history as a difficult one from an economic perspective. A bit of volatility after record high equity market levels is only natural.