Tesla and Amazon crash, is the tech trade dead? – Stock Market News

Dec 22, 2022 at 2:11 pm GMT- Marios Hadjikyriacos

It has been a dreadful year for tech juggernauts like Amazon and Tesla, whose shares are down 49% and 65% respectively. These high-valuation stocks suffered because of the dramatic spike in interest rates, forcing both companies to tighten their belts. While there might be some more downside left as the world economy flirts with recession, valuations are not horrible anymore and the recovery could be a story for 2023. 

Elon unloads Tesla shares

Elon Musk is not the world’s richest man anymore. The collapse in Tesla shares this year has put him in second place, and has made his shareholders very unhappy. Investor sentiment seems to have turned against the maverick billionaire, amid concerns that his crusade to restructure Twitter is distracting him from his duties as Tesla’s chief executive. 

But it goes beyond Musk’s erratic behavior. He has also been selling Tesla shares to finance his Twitter acquisition, unloading his stocks into a declining market, which added fuel to the selloff this year. 

Another core problem for Tesla shares was the dramatic rise in interest rates. Higher rates are toxic for stocks, especially those with expensive valuations like Tesla. Investors are reluctant to take chances in the equity market if they can suddenly earn a decent return elsewhere with much less risk.  

From a valuation perspective, Tesla shares look more attractive now, as a lot of the ‘hype’ has evaporated. The stock is trading at 25 times next year’s earnings estimates, which is not unreasonable for a company in its rapid-growth phase and with a long runway ahead. 

There are risks of course - the global economy is slowing down and ‘recession’ has become the new buzzword, so earnings growth could disappoint next year. Still, the risk-to-reward profile for Tesla shares has improved by leaps and bounds, and any deeper declines could offer long-term investors better entry points as the business itself is still in good shape.  

Amazon hits pandemic lows

Another stock that has fallen from grace is Amazon. The company became the first in history to lose $1 trillion in market value, with investors abandoning ship as profitability vanished this year. 

Amazon has gone on an investment rampage since the pandemic began, pouring tremendous amounts of money into its distribution centers and cloud platform in an attempt to scale its operations and fuel growth. It invested so much that the company is headed for a net loss this year, sparking protests among investors who want to see serious cost reductions. 

Indeed, the company is moving in this direction, recently announcing plans to trim expenses by laying off 10,000 people and launching a review of some cash-burning projects like its Alexa voice assistant. As such, analysts expect Amazon to move back to profitability next year, even despite the economic outlook turning darker. 

That said, Amazon shares are still expensive from a valuation angle. The stock is trading at 52.5 times next year’s earnings estimates, which is not cheap by any means. This suggests investors expect rapid growth in the coming years and are willing to pay a premium today. 

But it can also backfire. An expensive valuation relies on ‘hopes’, which can change quickly in case the earnings reality doesn’t match those expectations. In other words, Amazon doesn’t have a real valuation floor to fall back on. 

Still, there’s cause for optimism. Amazon is a leading player in cloud computing, an industry that is arguably in the early stages of its growth. Meanwhile, its advertising business has started to blossom, stealing market share from Meta and Google. It also offers third-party seller services, charging small businesses for access to its wide distribution network. 

The stock had a tough year and 2023 won’t be easy either considering the stretched valuation in a slowing economy. Even so, this is a unique company with multiple growing revenue streams, so investors with long time horizons could ultimately be rewarded.