The Nasdaq just had its biggest three-day loss since 2011, falling close to 5%. And tech investors are beginning to feel the strain.
Take Facebook (NASDAQ:FB) CEO, Mark Zuckerberg. According to CNBC, he’s “one of the biggest losers in the latest downturn in tech and momentum stocks.”
Zuckerberg’s net worth has fallen by $4.6 billion since March 4. Ouch!
Amazon’s (NASDAQ:AMZN) mastermind, Jeff Bezos, is hemorrhaging cash, too.
He’s down $3.4 billion over the same time period.
I asked renowned market expert and bestselling author, Karim Rahemtulla, to PLEASE get to the bottom of all of this.
As it turns out, social media has a lot to do with the present slaughtering of billionaires.
It all comes down to valuation. ~Robert Williams, Founder, Wall Street Daily
From the desk of Karim Rahemtulla…
Valuations for tech stocks have been running rampant – particularly in social media companies.
These stocks have been climbing over the past 18 months – after sentiment in the social media sector blasted higher when Facebook originally rebounded last year.
Twitter (NYSE:TWTR), for instance, is trading at an astounding 30 times next year’s sales – even more if you use its fully diluted market cap.
Things are beginning to change, though…
Investors are starting to realize that these valuations don’t make sense, and they’re running for the exits accordingly.
Consider, after reaching a high in the mid $70s, Twitter has plummeted all the way down to $43.
And it’s not the only example of investors showing signs of wariness in the sector…
In fact, the latest downward shift in the Nasdaq began after King Digital Entertainment’s (KING.K) recent IPO.
You likely know the company from its main product, Candy Crush – a hugely popular game on social media sites. Well, that single product accounts for a whopping 78% of King’s sales.
Ultimately, investors realized that the company’s $6-billion valuation is a tad excessive. And the stock crashed 16% off its IPO price before the Closing Bell.
Now, there is a bright side to consider…
Total Collapse Isn’t in the Cards Right Now
While the Nasdaq is certainly under fire right now because of these insane valuations of social media stocks, that’s not going to affect the overall market as much as you might think…
You see, based on the low interest-rate environment and continued growth in the U.S. economy, stocks that are maintaining earnings and sales growth (i.e., not social media stocks) are arguably nowhere near as expensive as in past market peaks.
During the internet boom, for example, stocks traded at more than 42 times forward earnings.
While that’s an aberration, the average price-to-earnings ratio during market peaks is in the mid-20s.
By comparison, we’re seeing around 18 times today. So we have a ways to go before things get really frothy.
Bottom line: Markets will ebb and they will flow. Sectors will come in and out of favor. But rest assured, there’s a strategy for every type of market. And where there really is a bona fide correction in the offing, we’ll be able to buy really good companies – at much cheaper prices.