Before November 2021, most investors and pundits believed that the Street’s favorite large-cap tech stocks — including Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) — were mostly or completely immune from major downturns. As a result, many, if not most, institutional investors loaded up on these names and others like them.
But now, of course, everything has changed. Many of the old favorites have sunk by 10% or more this year. Clearly the Street’s Big Tech darlings are not the safe haven from volatility and downturns that they once were.
Although I think the economy will avoid a recession and inflation will significantly ease going forward, I believe that some of these former Big Tech favorites, will continue to struggle in the medium term. As a result, I advise investors to sell shares of these three large-cap tech stocks.
The hardware giant is facing several tough problems. First, at a time when the Street has become weary of tech stocks with high valuations, Apple is seen by some as being in that category.
The forward price-to-earnings, price-to-book and price-to-sales ratios of AAPL stock are 22.5x, 33x and 5.9x, respectively. For a rapidly growing tech company with tremendous potential, those valuations are attractive. But for a tech giant that’s growing fairly slow and doesn’t seem to have any needle-moving potential products on the horizon, the stock’s valuation is somewhat steep.
Finally, consumers are rapidly shifting the bulk of their spending from goods to services. That’s not a good situation for a company like Apple, which earns most of its profits from tech hardware.
Like Apple, the electric vehicle maker is facing an array of problems. Because Tesla CEO Elon Musk advocated for free speech on Twitter and put himself in a position to change the platform’s policies, he has become an enemy of many left-wing Americans. Also not enhancing Musk’s image on the left were his recent criticism of Democrats in general and the Biden administration in particular.
Meanwhile, Musk and Tesla have become the target of multiple investigations by regulators, and TSLA stock was recently booted off of the S&P 500’s ESG Index. If Musk ends up taking control of Twitter, expect Tesla and its outspoken CEO to continue to be a target for many government regulators and large organizations that are less than thrilled with his political ideas. And even if the deal doesn’t go through, Musk and his company may still continue to be targets for those groups.
In Western countries, many consumers upset with Musk’s statements may decide to avoid buying Tesla’s EVs, while China’s economic slowdown could significantly hurt Tesla’s top and bottom lines.
The forward P/E ratio of TSLA stock is an elevated 56x, and, like Apple, the automaker could continue to be hurt by supply chain issues and the shift of consumer spending to services from goods. Finally, as many media outlets have noted, Tesla’s competition is growing quite quickly.
After Musk floated the idea of cutting his takeover bid for Twitter (NYSE:TWTR) based on the proportion of the company’s user base that are actually “bots,” TWTR stock is likely to be surrounded by uncertainty for some time.
In the wake of Musk’s statement, no one knows if he will actually buy the company, and it’s impossible to determine how much he’ll wind up paying if the transaction goes through. As a result of that situation, Twitter’s shares are likely to “twist in the wind” and underperform the Nasdaq for the next several months.
And as I pointed out in a previous column, Twitter is facing increasing competition from the right side of the political spectrum in the form of President Donald Trump’s Truth Social app. (The app’s parent company has agreed to merge with a SPAC called Digital World Acquisition Corp. (NASDAQ:DWAC)).
So if Musk does acquire Twitter, the company is going to be hurt by tremendous anger on the left and tough competition from the right.