The massive upticks in Netflix and Amazon stock throughout 2018 have brought love from investors and fear from analysts who worry the explosive growth of heavyweight tech stocks is unsustainable. Amazon’s market capitalization has soared to $770 billion, a 35 percent increase in the first quarter of 2018. Netflix stock has already reached 60 percent above the 2017 mark, while the company looks to double net income within the year.
Market strategists for the S&P 500 and Nasdaq Composite Index warn how technology stocks are a “crowded trade,” where investors are all owning the same stocks. The momentum of investors amplifies prices and magnifies volatility because the market becomes reliant on the success of a few firms. If sentiment shifts about tech stocks, prices can plummet, hurting millions of Americans and destabilizing the stock market.
Amazon and Netflix argue that their valuations, sometimes as high as 50 times the firm’s revenue, account for increased market capitalization and growth. Technology firms often have bloated valuations, as the cost of establishing a national or international infrastructure can be expensive and grueling. However, the extra influx of funds allows Amazon and Netflix to corner a market and seal places as the staples of their categories.
The outlook for Amazon, Netflix, and other tech giants is bright for the coming future, but the oversaturation of investment creates an unstable market reliant on select companies. According to a Reuters interview with Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, “People are going with what works, and if tech was working before the shakeout in February, then they’re going to stay in it.”