Tech Stocks Drop 9 Percent

Larry Page, left, and Sergey Brin co-founded Google, which yesterday fell below $400 for the first time in two years. Shares closed down 12 percent.
Larry Page, left, and Sergey Brin co-founded Google, which yesterday fell below $400 for the first time in two years. Shares closed down 12 percent. (By Jb Reed -- Bloomberg News)
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By Kim Hart
Washington Post Staff Writer
Tuesday, September 30, 2008

Technology stocks took a nosedive yesterday, falling about 9 percent, as the Nasdaq had its worst drop since the Internet bubble imploded in 2000, a sign that no sector is immune to the current financial turmoil, analysts said.

The Dow Jones industrial average was down about 778 points -- its largest one-day point drop ever -- after the news that the plan to rescue the nation's financial markets failed on the House floor. Tech heavyweights Apple and Google took hits, signaling flagging investor confidence and a grim outlook for consumer spending during the holiday season and well into next year.

"Tech took it on the chin disproportionately," said Ross Sandler, senior Internet analyst at RBC Capital Markets. Panicked investors are moving out of higher-risk sectors, such as technology, that are not considered to be essential to daily life and putting their money into safer areas, such as health care and household goods, that are thought to be more resilient to market turbulence, he said.

There's a fear of serious consumer weakness into the third and fourth quarters, he said. "Couple that with investors leaving the tech sector and the stuff out of Congress, and you've got a perfect storm for panic selling."

The failure of the bailout package frightened investors that the economic downturn could worsen and last longer, which is bad news for premium-priced consumer products, said Andy Hargreaves, senior analyst at Pacific Crest Securities.

"The question is not whether we'll be in a consumer spending recession; the question is how bad it will be," he said.

Apple had a particularly jarring day, starting when several analysts downgraded its shares, causing a 9 percent drop. News of the failed bailout plan doubled its daily loss, and it closed down 18 percent, at $105.26, its lowest close in the past year.

Despite strong sales of Apple's iPhone, Morgan Stanley analyst Kathryn Huberty said in a note to investors that consumers would shift to lower-priced products because of the uncertain economic conditions, causing Apple's premium-priced Mac computers to suffer.

"Downgrades were based on the assumption that our economy is going into a recession, possibly a severe recession, and it's clear consumers are going to be affected," said Charlie Wolf, security analyst at Needham.

Internet firms also experienced deep losses in anticipation that advertising budgets will be slashed and consumers will do less online shopping. Google shares lost 12 percent, to close at $381.00, dipping below $400 a share for the first time in two years. Amazon fell 10 percent, to close at $63.35; eBay fell 12 percent, to close at $19.95; and Yahoo fell 11 percent, to close at $16.88.

"For these stocks, the failure of Congress to pass the bailout plan further ensures that the macroeconomic weakness will linger and we're likely in a recession," said Clayton Moran, stock analyst at Stanford Group. "Companies that are dependent on consumer buying behavior and advertising budgets are going to be hurt."

Google dominates the Web-search market, making it less susceptible to a major recession than a company like Yahoo that relies heavily on brand advertising, he said. But as consumers search for fewer books, airline tickets, hotels and clothing deals, Google's results could also decline.

The high-flying tech stocks of the 1990s crashed hard in 2000 when investors stopped funding relatively young and untested firms. The technology sector started to recover in 2003 and rose on a fairly stable growth trajectory.

Technology companies are more likely to rebound more quickly than other sectors when conditions start to improve, Sanders said.

"Tech stocks rally harder and faster as an early cycle mover," he said.

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