Why have shares dropped as SpaceX leads the tech selloff?

SpaceX continues to trade above its IPO price despite recent drops, but investors are becoming more cautious

Over the past week, tech shares have sold off, with SpaceX's stock seeing sharp drops just days after the company's amazing initial public offering (IPO).

The week ending June 23 saw a 2.1 percent decline in the Nasdaq 100, a US index that primarily consists of technology stocks, and a 1.9 percent decline in the SandP 500.

SpaceX (NASDAQ:SPCX) experienced sharp drops as well, losing 26.2 percent to drop its share price below the level it closed at on its first trading day after its initial public offering (IPO) less than two weeks prior.

Although SpaceX is not yet included in either index, its decline indicates a negative shift in the market's attitude toward tech stocks given the immediate success of its IPO.

"Investors remain super-cautious, nervous that high valuations could be chipped away at again," said Susannah Streeter, chief investment strategist at wealth management firm Wealth Club. Watch the entire video here. "Even a recent alleviation of the energy crisis, with oil prices continuing to decline, isn't doing much to improve mood."

What is causing the most recent sell-off in the tech industry, specifically for SpaceX?

What caused the tech stock to plummet?

There is a sense of caution surrounding technology stocks due to a number of factors coming together.

One is the brittleness of last week's peace deal between the United States and Iran.

According to Tom Stevenson, investment director at Fidelity International, "talks continue in Switzerland with the US to turn a memorandum of understanding and a ceasefire extension into something more like a permanent solution to the war that began nearly four months ago, despite threats over the weekend from Iran that it could re-close the Strait of Hormuz following continued fighting between Israel and the Hizbollah militia it supports in Lebanon."

The possibility that central banks will raise interest rates in reaction to growing inflation has also alarmed markets. International counterparts in the EU and Japan both increased their rates by a quarter of a percentage point, while the Federal Reserve and the Bank of England both held rates during their meeting last week.

A growing worry about whether the artificial intelligence boom will be profitable is the root cause of much of the negative sentiment surrounding technology in particular.

According to Stevenson, "the boom feels fragile with doubts about the returns that can be achieved on investments worth hundreds of billions of dollars, together with a rising challenge to equity investors from rising bond yields, more equity issuance, and fewer share buybacks."

Shares of SpaceX decline when debt is issued.

As SpaceX shareholders discovered this week, debt issuance is currently a critical top priority for tech investors.

The company declared on June 22 that it was looking to raise £20 billion in debt; the next day, the amount increased to £25 billion.

SpaceX's stock dropped 16.4% on June 22 before marginally rising on June 23.

"Issuing debt at such a heady valuation raises questions about cash flow for this hugely capital-intensive venture," stated Streeter of Wealth Clubs. "SpaceX burned off the majority of its post-launch steam and came down to Earth with a bump."

Despite these drops, SpaceX shares ended June 23 at 15.6% above their IPO price of £135 and 4.1% above the £150 at which they began trading on June 12.

Are tech shares worth purchasing?

When markets or sectors sell off, there's always a chance to buy.

Depending on your situation and objectives, you may or may not want to profit from the recent decline in tech stocks. However, it is important to remember that the industry is still highly valued and is volatile, as recent events have demonstrated.

Investment trusts and exchange-traded funds (ETFs) that provide exposure to the tech industry are worth considering if you are looking to purchase tech shares.

(LON:ATT) Allianz Technology Trust. As of May 31, top holdings Nvidia, Alphabet, Micron Technology, and Apple made up 30% of the portfolio; however, as of June 23, the trust was trading at a 7.3% discount to net asset value (NAV), according to data from the Association of Investment Companies, a trade association for investment trusts. Polar Capital Technology (PCT, LON). In a similar vein, the majority of the portfolio is made up of large tech companies, with over 96% of holdings having a market capitalization of more than £10 billion as of May 29. However, these companies trade at a 9.2% discount to NAV. ETF for WisdomTree Space Economy (LON:WSPG). SpaceX will join the ETF portfolio on June 29 with a starting weighting of 5.5 percent. Top holdings as of June 23 include Japanese industrial company Mitsubishi Heavy Industries and space launch company Rocket Lab.