In the two decades since the dot-com crash, investors have been bracing for another bubble to burst. Yet tech companies such as Facebook and Alphabet still enjoy uninterrupted expansion and unwavering faith among their investors that it will continue.
Even the financial crisis of 2008 barely registered as a blip. But now there is serious talk among entrepreneurs and investors that the correction everyone feared might finally be happening.
Given how intrinsically technology is woven into our lives — and how it will pioneer new avenues through augmented reality, streaming services, artificial intelligence and more — the broader tech boom of the past two decades seems set to continue in the long run.
But investors for now must navigate something novel: uncertainty. Already the Nasdaq 100 has fallen about 23% since November 2021. That is as steep a drop as it experienced in March 2020 with the onset of global Covid-19 lockdowns. If it slides a couple percentage points more, that will mark its biggest decline ever in a single year. FAANG stocks, including Facebook parent Meta Platforms, Apple, Amazon, Netflix and Google, had on Friday lost roughly $2-trillion in value since the start of 2022.
It is worth noting that the markets have never experienced a transition from a global pandemic that made millions of people housebound. There is no historical reference point. Now companies and investors are trying to process an explosion of pent-up demand, where consumers have rushed out of the confines of their homes to buy things in physical stores and plan “revenge travel”. The Walt Disney Co. has had more visitors to its theme park in Florida than it did before Covid.
As companies hurt most by the pandemic see their fortunes swing back into positive territory, tech’s lockdown darlings are suffering from a reassessment of value that arguably looks overdone for some. Take Spotify. Last week, shares in the music-streaming pioneer were trading at a record low of $105, and down 57% since the start of 2022, despite just reporting its biggest growth in profit in the last quarter and 15% annual growth in subscribers to 182-million.
Zoom Video Communications has lost 45% of its value since the start of 2022, despite steady quarterly net-income growth. Zoom’s drop seems especially weird given how much businesses continue to use its product for meetings, even as their staff return to offices.
But while not everyone deserves to suffer from a broader correction, it was bound to happen. Many tech valuations were indefensible. Should Tesla really be worth more than six times the combined market value of General Motors and Ford? And considering that it took nearly four decades for Apple to reach a market valuation of $1-trillion, should it have taken fewer than four years to hit $3-trillion?
Probably not. Now signs are pointing to a mood shift among tech firms and those who invest in them. Facebook is pausing hiring, a previously unfathomable prospect. The company blamed macroeconomic challenges and Apple’s privacy changes for its slowest revenue growth in 10 years last quarter. But its falling shares and reputation for causing psychological harm to users of its platforms are also making it harder to attract talented engineers, which Mark Zuckerberg desperately needs to realise his metaverse ambitions. Little wonder the company is treading more cautiously into the metaverse now, having also said it will invest less than it originally intended in virtual reality.
SPACs (remember special purpose acquisition companies?) meanwhile seem to have fallen in number, leading to far fewer late-stage exits for tech companies so far this year. Sneer as much as you like at the “blank cheque” backers of companies that had no business going public — they probably helped stave off the tech market correction we’re now witnessing for at least half a year or more.
With many SPAC investors burnt by misadventure, venture capitalists might also be poised to rein in their activity in private markets. One venture capital investor in London said they had seen three different funding deals for tech start-ups, worth about $5m each, collapse in the past few of weeks. Celebrity shoutout app Cameo said last week it was cutting nearly 90 jobs; the week before, fintech darling Robinhood Markets said it would cut about 9% of its 3,400-person workforce.
Chances are that the falls are not at an end as many of the factors driving the rout — high inflation, supply chain disruption and that long-time-coming reassessment on value — promise to stick around. But with technology products plugged so deeply into our daily infrastructure, tech valuations will continue growing for the long haul. This is probably not the precursor to a burst, but a temporary deflation.
That means equity investors must now contend with a new and unfamiliar era of doubt for tech, while venture capital funds shore up cash to ride out the next couple of years. Start-ups will have to do the same. It will be painful, but it won’t last forever.
Bloomberg. More stories like this available at Bloomberg.com