(Bloomberg) — The belief in everlasting growth that is priced into technology companies’ lofty stock market valuations is increasingly looking more like a myth than reality.
Netflix Inc. helped set off this existential crisis late Tuesday by shocking investors with its first loss of subscribers in more than a decade. A day later, shares of the streaming pioneer are plunging more than 36% and dragging down several media and tech peers as investors question their assumptions.
Tesla Inc., arguably the ultimate growth stock, reports earnings after the bell on Wednesday, giving investors another opportunity to judge whether these high-flying companies can keep soaring amid rising Treasury yields and booming inflation. The stock is down more than 4.5% and weighing on the S&P 500 and Nasdaq 100 indexes, while options traders increased bearish positions ahead of the results.
“Underlying the high valuations was a strong belief that these companies would continue to see unparalleled growth and that they could all come out winners,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “We have begun to see more and more evidence that call those assumptions into question.”
Read more: Netflix Shares Plunge 39% After Massive Subscriber Loss
The tech-heavy Nasdaq 100 trades at 32 times trailing earnings compared with 23 for the S&P 500. The index fell as much as 1.6% on Wednesday, after rising earlier this week.
Wall Street had been growing more optimistic about the tech sector’s ability to deliver bigger profits even as some of the shares slump. The Nasdaq 100 is down 14% since the start of the year, with megacaps such as Microsoft Corp. and Google parent Alphabet Inc. underpforming broad indexes.
Of course, many investors are undeterred and continue to see companies like Apple Inc. as one of the best places for reliable growth at a reasonable price. The iPhone maker is little changed on Wednesday and has outperformed the S&P 500 this year.
Disposable Bets
Still, Netflix’s flop stoke concerns that earnings season is going to deliver more disappointment for companies like Shopify Inc. that benefited from a pull-forward in demand during the Covid-19 pandemic only to see it fade away.
The biggest decliners on Wednesday were a who’s who list of former growth darlings. Facebook parent Meta Platforms Inc. suffered its worst drop in more than two months, falling as much as 7.8%. Peloton Interactive Inc. and DocuSign Inc. each declined more than 8%.
Netflix is causing a lot of investors to reassess a lot of long-held assumptions about technology stocks, according Craig Erlam, senior market analyst with Oanda.
“In a time of households budgets being squeezed, how high up the list are streaming services like Netflix when it comes to cutting back?” he said. “What other tech services are easy to dispose of?”
(Updates Tesla and Netflix stock moves.)
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