Recently, Meta, Facebook’s parent company, lost the equivalent to the entire GDP of Peru. $200B was wiped from their valuation. Just last month, streaming colossus Netflix lost $50B overnight. Such precipitous declines sent shockwaves through the stock market, leaving many wondering how a company can lose so much money and if it makes sense to encourage clients to buy the dip.
Using your clients’ risk assessment, RIA portfolio management software and maybe even planning software, you can help clients create a course of action that is best for them incorporating volatile stocks. That said, it’s good to remember why some stocks are so volatile and strike a good balance of education to keep your clients informed and comfortable with the decisions they make for their asset allocation.
Tech Companies Run on Data
The foremost thing to remind your clients about tech stocks is that they primarily produce data. Yes, Netflix employs a lot of people and there are a lot of physical assets that go into creating an original show, but ultimately, they’re making pixels for your eyes and soundwaves for your ears in exchange for chronicling what you like and how you consume entertainment. Likewise, Facebook has almost no tangible products save for the VR gaming system, Oculus.
Data is everywhere and because it has no real physical structure there won’t be new versions or iteration on an actual purchasable product, so it’s easier to jump ship. People can move off of Facebook to Twitter, or even fringe social media like Gettr or Gab, without investing hardly anything, and investors know this. Similarly, revenue is directly built on user acquisition, a slippery metric, as it requires more and more people to sign up. While this is easier with a company like Netflix, bringing back users they lost with new content, it’s a lot harder with social media companies as their users are the ones who create the content. Having an active Facebook account you started 10 years ago is doing little for adding value to the platform.
Volatility and Competition
Another important reminder for clients is that competition is boundless and dramatically easier to conjure in the tech space. Because the internet is essentially a free-for-all and there’s largely no restrictions on who can access what, it means anyone can whittle away the market cap of its bigger competitors. Whereas an oil company, by contrast, spends decades making connections with foreign governments, solidifying drilling rights, and securing its spot at the top of the food chain, tech companies can be built, tested, and launched from someone’s basement. Just last year, Rumble, a free-speech oriented YouTube competitor, launched. It saw a massive speculative bump when it offered Joe Rogan $100m over four years to move off of Spotify due to censorship concerns.
Simply put, the very reason that companies like Netflix and Facebook grew so fast (onboarding new users via quick and relatively painless experiences) is exactly the same reason they can lose so much market share in a similar fashion. This quick and explosive growth has led many to believe that these companies are overvalued, meaning that their drawbacks may be that much more painful for shareholders when the market corrects.
Takeaways for your Clients
The volatility of tech stocks is another good reminder to help your clients embrace a truly diversified portfolio. If your inbox is filling up from clients asking about this recent drawback, it’s a great time to talk to them about diversification and explain why these types of stocks see such great swings. It’s also a good time to run financial models using your RIA portfolio management or planning software so that they can see the impact investing in volatile stocks may have on their long-term outlook.
Tech stocks will always be volatile because the internet is free and open. It’s practically the epitome of the “free market.” Oftentimes, there’s a pot of gold waiting at the end of the tech stock rainbow, but your clients may need to weather a few thunderstorms for those colors to appear.
