Their fortunes have, however, dramatically changed following a brutal sell-off in heavyweight technology stocks that sent the Nasdaq Composite index into correction territory in just three sessions.
Overall, $US1 trillion was wiped off the value of six of the biggest technology companies. Apple alone lost $US325 billion, while Amazon, Facebook, Google, Tesla and Microsoft all collapsed by tens if not hundreds of billions of dollars.
Tesla was hit the most sharply. Its shares lost a record 21 per cent on Tuesday, its biggest one-day fall ever, shedding more than $US80 billion in value and wiping $US16 billion off the wealth of boss Musk. The rollercoaster continued on Wednesday with Tesla among the big gainers as it jumped by 11 per cent before closing higher again on Thursday.
We have been bullish on Tesla for two years now, but I must admit it has been hard to keep track of the speed of the moves. There has been logic in the exuberance, but it is very hard to know when it stops.
Jefferies analysts Philippe Houchois
So what has driven Tesla’s rise and fall, and that of wider tech stocks? Those optimistic on Tesla’s future argue that, while nominally a car company, it also has experiments in robo-taxis and plans for huge battery factories. On September 22, Musk is planning a “Battery Day” to show off a new motor that would allow hundreds of miles of range on a single charge.
Philippe Houchois, an analyst covering Tesla at Jefferies, says: “We have been bullish on Tesla for two years now, but I must admit it has been hard to keep track of the speed of the moves. There has been logic in the exuberance, but it is very hard to know when it stops.”
But sceptics argue that Tesla’s valuation has far exceeded the realms of common sense. “The issue can be summed up like this,” says Richard Windsor, an independent analyst at Radio Free Mobile: “The notion that Tesla can be worth more than the rest of the automobile industry combined is patently absurd.”
Of course, it is not just Tesla that has been driven up. Across the board, tech stocks have surged. In part, this has been caused by amateur investors flooding into risky options on apps, such as the trading app Robinhood.
On some days, upwards of 60,000 retail investors on Robinhood were adding Tesla to their portfolios.
Signs had been mounting that bulls had taken the rally too far with retail investors piling into momentum trades, snapping up shares of bankrupt companies and using leverage in the options market to fuel further gains in targeted tech stocks.
While retail investors undoubtedly played their role in the seemingly unending rise in technology darlings, it appears that one investor had a much larger hand in driving the tech frenzy.
The SoftBank whale
Japanese investment conglomerate SoftBank was unmasked as the Nasdaq “whale”, by a report in the Financial Times last week. SoftBank has supposedly poured billions of dollars into tech options, including Apple, Tesla, Microsoft, Zoom and Nvidia, that is believed to have had an enormous influence on the rally.
For Tesla, in addition to the SoftBank-aided sell-off, an announcement of an additional $US5 billion stock offering on September 1 may have been more than the market was willing to bite at. This week, it was also excluded from inclusion in a reshuffle of the S&P 500, while a smaller rival building electric trucks, Nikola, received a substantial investment from GM.
While the tech features some nosebleed inducing rises and falls, there is also the likelihood that many funds have simply been securing the huge profits they have made this year. Even SoftBank is reported to have made $US4 billion with its high-stakes bet on technology stocks.
No fears over dotcom, yet
The wild rises and falls of tech stocks have left many wondering whether this tech boom compares to the previous dotcom crash.
Some market watchers argue that the biggest technology companies make billions of pounds in profits each year. At the height of the dotcom bubble, most companies made no money at all. A note from JP Morgan said most tech firms feature healthy balance sheets and huge profits.
“Tech has been relatively less hurt by the current COVID-19 crisis, in particular when compared to consumer sectors. Parts of the tech space have, in fact, taken greater market share during the current virus dislocation,” JP Morgan said.
“Longer term, tech remains the winner of the ongoing structural disruption, including the shift to AI and increased penetration of EVs.”
While Apple shares fell 15 per cent from their high at the end of August, the iPhone maker still makes enormous profits, raking in all time record profits in March at the height of the pandemic, with $US22 billion in profit.
Compared to the dotcom crash, tech’s massive valuations – with four trillion dollar companies – are also not so wild. Right now, tech’s price-to-earnings ratio, a measure of their profits versus their share price, is around 90 per cent. During dotcom, companies with almost no value had 250 per cent P/E ratios. In some ways, this latest rally and crash may not be so different to others seen in previous years. Tech stocks normally outperform the market, since they are seen as long-term bets. When the market does badly, that means they are also first to fall. While the $US1 trillion fall in the last week may sound like a lot, tech stocks endured similar falls in 2018 amid fears over the trade war, and at the start of the pandemic. They have since rebounded.
“These corrections are needed and they are healthy in a way,” says Houchois, of Jefferies.
But as the company that has had the most to gain from the tech boom, Tesla also has the most to lose. It just remains to be seen how much.