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High-flying tech stocks take a tumble

SAN FRANCISCO — The stock market's laws of gravity are inflicting pain on its highest fliers.

Just look at the list of technology trailblazers whose values have plummeted from record highs during the past few weeks. Investors have refocused on safer sectors such as utilities, health care and consumer staples instead of companies that promise potential growth from online services that are building huge audiences.

Stung by the abrupt change in sentiment, the stocks of recent stars such as Netflix, Facebook, Twitter and LinkedIn are 20 to 45 percent below their recent peaks. The steep downfall is raising questions about whether this is just a fleeting fit of fickleness or the foreshadowing of another market bubble about to burst.

The optimists point out that technology remains a bright spot in an otherwise dreary economy as software, computers, mobile devices and the Internet fill increasingly instrumental roles in work, entertainment and communications.

"Tech is where the action is," says longtime industry analyst Roger Kay.

Pessimists view the tech sector as ground zero for a long-overdue reckoning. They say the stock market has been pumped up by the flood of money that the Federal Reserve has funneled into the long-term bond market since the financial meltdown of 2008 decimated the economy. Now that those government-backed bond purchases are tapering off, people are starting to realize that "the only thing holding this balloon up is the Fed blowing air in it," said Fred Hickey, editor of the High-Tech Strategist newsletter.

That's why he thinks investors are parachuting from stocks that had soared to dizzying heights in a short period of time.

Internet video subscription service Netflix, for instance, nearly quadrupled in value last year to top the charts of the bellwether Standard & Poor's 500 index. The company was worth $27 billion by the time its stock peaked at $458 early last month. At that price, investors were paying the equivalent of $117 for every $1 of Netflix's projected earnings. Investors were betting Netflix will become increasingly prosperous as the number of U.S. subscribers to its $8-per-month video-streaming services swells from 33 million at the end of last year to management's long-term hopes for 90 million.

Another mind-boggling run-up occurred after short-messaging service Twitter priced its initial public offering at $26 per share in November. By late last year, Twitter's stock had more than doubled to a peak of $74.73. At that level, Twitter boasted a market value of roughly $50 billion, even though the San Francisco company has never turned a profit in its eight-year history. The stock lost nearly half its value as it tumbled down to about $40. That still leaves Twitter with a market value of about $28 billion.

"It's the most insane pricing I have seen since 2000," Hickey says of technology stock prices.

Invoking the year 2000 is a touchy subject in technology circles because it hearkens back to the end of the dot-com boom. By one key measure, tech stocks aren't nearly as overvalued as they were in 2000 when the accelerating adoption of personal computers and the early days of the World Wide Web drove an investment fervor that lasted through most of the 1990s.

By March 2000, investors were paying $68.72 for every $1 in earnings generated by companies in the S&P 500 information technology index, according to S&P Capital IQ. Last month, the ratio stood at $18.26 for every $1 in earnings in the same index.

"This is like a little bubble that kind of popped up in the past year or so," said Daniel Morgan, a portfolio manager at Synovus Trust Company, who focuses mostly on technology.

Rough week

on the street

Led by a downturn in technology stocks, the major U.S. stock indexes posted significant losses for the week. Here are Friday's closing figures and the percentage change from the previous Friday's closes:

Dow

16,026.75

-2.4%

S&P 500

1,815.69

-2.6%

Nasdaq

3,999.73

-3.1%

High-flying tech stocks take a tumble 04/11/14 [Last modified: Friday, April 11, 2014 8:53pm]
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