Tech shares have sold off over the past week with SpaceX stock seeing steep declines days after the company’s spectacular initial public offering (IPO).
The Nasdaq 100 – a US index mostly containing technology stocks – fell 2.1% in the week to 23 June and the S&P 500 fell 1.9% over the same period.
SpaceX (NASDAQ:SPCX) also saw steep declines, shedding 26.2% to bring its share price to below the level it closed its first day of trading following its IPO less than two weeks before.
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SpaceX is not yet included in either index, but given the immediate success of its IPO its slide reflects a pessimistic shift in the market mood towards tech stocks.
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“Investors remain super-cautious, nervous that high valuations could be chipped away at again,” said Susannah Streeter, chief investment strategist at wealth manager Wealth Club. “Even a fresh easing of the energy crunch, with oil prices dipping further, isn’t lifting sentiment much.”
What’s driving the latest sell-off, both for the tech sector and for SpaceX in particular?
Why did tech shares sell off?
Several factors are converging to create a cautious air around technology stocks.
One is the fragility of the peace agreement reached between the US and Iran last week.
“Despite threats over the weekend from Iran that it could re-close the Strait of Hormuz following continued fighting between Israel and the Hizbollah militia it supports in Lebanon, talks continue in Switzerland with the US to turn a memorandum of understanding and a ceasefire extension into something more like a permanent solution to the war that began nearly four months ago,” said Tom Stevenson, investment director at Fidelity International.
Markets are also spooked at the prospect of central banks hiking interest rates in response to rising inflation. While the Federal Reserve and the Bank of England both held rates when they met last week, international counterparts in the EU and Japan both raised their respective rates by a quarter of a percentage point.
Underpinning much of the negativity around tech specifically is a rising concern over whether the artificial intelligence boom can pay for itself.
“With doubts about the returns that can be achieved on investments worth hundreds of billions of dollars, together with a rising challenge to equity investors from rising bond yields, more equity issuance and fewer share buybacks, the boom feels fragile,” said Stevenson.
SpaceX shares fall on debt issuance
Debt issuance is a crucial top for tech investors at present, as SpaceX shareholders found out the hard way this week.
On 22 June, the company announced that it was seeking to raise $20 billion in debt, with the figure rising to $25 billion the following day.
Shares in SpaceX fell 16.4% on 22 June before recovering slightly on 23 June.
“Issuing debt at such a heady valuation raises questions about cash flow for this hugely capital-intensive venture,” said Wealth Club’s Streeter. “SpaceX has come down to earth with a bump, burning off most of its post-launch steam.”
Despite these declines, SpaceX shares closed 23 June 15.6% above their IPO price of $135 and 4.1% above the $150 at which they opened trading on 12 June.
Should you buy tech shares?
There is always a potential buying opportunity when sectors or markets sell off.
Whether you want to take advantage of the recent pull back in tech stocks depends largely on your circumstances and goals. It is worth bearing in mind, though, that the sector is still highly valued, and as recent days have shown it is prone to volatility.
If you are looking to buy tech shares, you could consider the following investment trusts and exchange-traded funds (ETFs) which offer exposure to the sector:
- Allianz Technology Trust (LON:ATT). Top holdings Nvidia, Alphabet, Micron Technology and Apple account for 30% of the portfolio as of 31 May, but the trust trades at a 7.3% discount to net asset value (NAV) as of 23 June, according to data from investment trust industry body the Association of Investment Companies.
- Polar Capital Technology (LON:PCT). Similarly, large tech companies account for most of the portfolio (over 96% of holdings have a market cap above $10 billion as of 29 May), but trades at a 9.2% discount to NAV.
- WisdomTree Space Economy ETF (LON:WSPG). From 29 June, SpaceX will enter the ETF’s portfolio with an initial 5.5% weighting. As of 23 June top holdings include space launch provider Rocket Lab and Japanese industrial firm Mitsubishi Heavy Industries.
