The Washington PostDemocracy Dies in Darkness

Tech stocks have sold off sharply. Is it a blip — or something more?

Chaotic markets and public backlash have pummeled tech stocks this year.

Facebook is down 38 percent from its peak. Netflix is down 40 percent. Apple slipped 33 percent, and Amazon 28 percent. Alphabet, owner of Google, is down 19 percent.

The nation’s top-performing tech companies — known colloquially as the FAANGs (Facebook, Apple, Amazon, Netflix and Google) — have led the sharp U.S. market sell-off over the past few months, which has unnerved most people who own stocks. It’s a far cry from last summer, when the question was whether Apple or Amazon would be the first U.S. company to be valued at more than $1 trillion.

Now the question facing the tech industry — and the millions of ordinary investors with disproportionate exposure to tech — is whether the decline represents a healthy correction after years of gains or more fundamental changes that could limit the sector’s upside in the years to come.

Some analysts argue that the tech sector is being hit by some of the same factors pushing down stocks overall, like interest-rate hikes and the trade war with China. However, the biggest tech companies are also facing new, more enduring doubts about their future — such as whether they’ll be able to use personal data as profitably as they have, whether they’re getting too big and whether consumers are growing less attached to their platforms.

The implications are significant given tech’s outsize role in the stock market. As of Dec. 24, information technology represented nearly 20 percent of the market value of the Standard & Poor’s 500-stock index, the most of any sector, according to Howard Silverblatt, senior index analyst with S&P Dow Jones Indices. It was just 15 percent a decade ago. Asset managers like Vanguard own huge chunks of Apple, Facebook and other tech companies, which provides an idea of how many people are exposed to these firms through their 401(k) retirement funds and other investment accounts.

“Momentum builds going up and it could suddenly build in the other direction,” said David Kass, a finance professor at the University of Maryland.

He argued, however, that most of the sell reflects anxiety rather than fundamentals.

“There’s the psychology of the market, maybe even an element of panic entering investment decisions,” he said. “I still think technology stocks remain the leaders because that’s where the growth is, but valuations have come down, as they should have.”

FAANG gets bitten

Facebook has had the most problems of any of the big tech firms. The social media company, whose stock price peaked in July, was rocked by a major data-privacy scandal earlier this year, when the company confirmed the political consultancy Cambridge Analytica had improperly accessed the personal information of millions of users. The Federal Trade Commission opened an investigation, and earlier this month, the attorney general of the District of Columbia filed a lawsuit against the company for missteps involving Cambridge Analytica.

The Senate Intelligence Committee also released two reports on Russia’s social media campaign designed to interfere with the 2016 presidential election, which relied in part on Facebook’s network to spread propaganda and target specific demographics, including African Americans. The reports prompted the NAACP to urge Americans to temporarily boycott Facebook and further undermined user trust in the company.

The social network has faced other controversies, too, leading many analysts to raise questions about a business model based on the monetization of personal data. Also alarming to investors has been the company’s most recent earnings reports, which suggested Facebook’s massive user base may be changing their behaviors: The number of users in Europe and America have flatlined, while the company’s profitability has not been as robust.

“A big part of the concern is that they have lost customer trust — Cambridge Analytica, the election connection, data privacy — that has really weighed down Facebook stock,” said Rishi Jaluria, an analyst at D.A. Davidson, a financial services firm.

Facebook declined to comment.

Other FAANG companies are dealing with their own obstacles.

Amazon has drawn criticism over its treatment of workers, and some experts have questioned whether it is growing into a modern-day monopoly. It also got flak for its year-long search for a second headquarters before finally deciding to split the expansion between New York and Northern Virginia. In New York, officials have raised concerns about the subsidies being given to Amazon for its new campus. (Amazon’s chief executive, Jeffrey P. Bezos, owns The Washington Post.)

“As a company, we work hard to provide a safe, quality working environment for the 250,000 hourly employees across Amazon’s U.S. facilities,” Amazon said in a statement. “We encourage anyone to compare our pay, benefits, and workplace to other major employers across the country.”

Netflix is coping with mounting fears that a host of new competitors armed with popular content will yank subscribers. Companies that plan to launch rival streaming services — Disney, NBCUniversal and WarnerMedia — own more than half of the most-popular shows on Netflix, according to an analysis published by Recode. Of the top 10 shows on the streaming service, Netflix competitors own eight, the report showed. And while competitors may not necessarily pull programming from Netflix, they could extract higher fees from the company to run their content, increasing its costs. Netflix declined to comment.

Apple’s latest iPhone was priced at $1,000, potentially suppressing demand. Last month, a key supplier disclosed that one of its largest customers, which analysts identified as Apple, had reduced its shipment requests. The company also faces lingering concerns over its ability to deliver more than incremental hardware updates and crank out show-stealing gadgets. Apple also declined to comment.

Google, meanwhile, faces questions about abusive content, particularly on its YouTube subsidiary, and the spread of misinformation mirrors that of Facebook.

Earlier this month, the company’s chief executive appeared before a congressional committee for the first time, fielding questions about privacy practices, its global expansion and how it goes about policing hate speech. Lawmakers from both parties have expressed concerns over the workings of Google’s search algorithms and the scope of data collection on its Android operating system. Democrats, who will take control of the House of Representatives in January, are expected to more aggressively scrutinize the company’s practices.

Google declined to comment.

A correction or a new era?

R “Ray” Wang, principal analyst and chief executive at Constellation Research, argued that the sell-off that started this fall is likely short term, driven by computerized trading that tends to amplify market swings. He says he expects a bounce when the tech companies report earnings early next year.

“From what we can tell, it’s the algorithmic trading that accelerated this,” Wang said. “Massive gyrations created the psychology that everyone thought, ‘Oh my god, oh my god, I have to make a move.’”

For Wang, tech’s sustained double-digit growth, the winners-take-all dynamics of their businesses and the varied operations infused with mounds of data, are too appealing for investors to pass up.

But things could get worse.

Policymakers around the world are exploring ideas that could place tough restrictions on the use of personal data, hobbling Silicon Valley’s ability to squeeze value from collecting stockpiles of personal information and limiting the types of insights that fueled their expansion in the first place.

“That’s the risk to all these FAANGs. The only risk to the FAANGs is the government,” said Ross Gerber, president and chief executive of Gerber Kawasaki, a wealth and investment management firm based in Santa Monica, Calif.

Wall Street may also continue to sour on big tech in the long term if those companies fail to continue to innovate or make advancements in artificial intelligence.

Matt Ocko, a co-managing partner at DCVC, a San Francisco venture capital firm, sees a particular backlash aimed at some of the biggest tech names, but not the industry as a whole.

“You can talk about a backlash of quasi-monopolist advertising and media companies, but it’s not a backlash against tech,” he said.

Still, tech companies would have to fall much more to truly change their image. Even after the sell-off, most of the FAANGs are doing well year-to-date, with Amazon still up 25 percent, Netflix up 33 percent and Google and Apple down only by single digits. That’s compared to an 8 percent decline for the S&P.

Facebook is the biggest loser, having lost about a quarter of its value year-to-date.