Tech bubbles burst everywhere

A favorite pastime in Silicon Valley, right after the invention of the next big thing, is bubble detection. Even industry insiders tend to get it spectacularly wrong. “You’ll see dead unicorns this year,” renowned venture capitalist Bill Gurley predicted in 2015, the year incubating these startups worth more than $1.6 billion. billion New Zealand dollars) has really taken off.

The game has become much easier: the sound of popping bubbles can be heard everywhere. Tech stocks, initial public offerings (IPOs), blank check companies (called SPACs), startup valuations and even cryptocurrencies: all assets that have reached dizzying heights in recent years are coming back down to earth. It’s harder to say how badly they’ll burst — and which ones might still bubble up again.

The decline in tech stocks is the most dramatic. The NDXT, the index of the 100 largest technology companies on the Nasdaq stock exchange, has fallen by a third since its peak in early November. Companies in this index lost a combined market value of $2.8 trillion.

High-flying startups that have gone public in recent years have also been hit hard. Shares of Robinhood are 80% below the level at which the retail app went public in July 2021. Those of Peloton, which makes internet-connected exercise bikes, have lost more than 90% of their value since their heyday. Overall, the largest newly listed companies are worth 38% less than at the start of the year.

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No wonder IPOS have dried up. From January to April 2021, some 150 companies went public in America, most of them tech-savvy. This year, only 30 have done so. The boom of SPACs, which go public and then find a startup to merge with, has imploded. Of more than 1,000 such companies that have floated in America since 2018, only a third have merged with a target. Many of those who made deals have lost their luster. According to an index listing the 25 most misspaced vehicles, they have lost 56% of their value since the start of the year.

As tech stocks tumble, they drag private company valuations down with them. CB Insights, a research firm, estimates that tech startups raised $628 billion globally in 2021 in more than 34,000 deals. Between January and March of this year, the number of transactions decreased by 5% compared to the previous quarter. The amount of capital invested fell 19%, the biggest quarterly drop since 2012. Superstar investors in the unicorn boom took a beating. On May 12, SoftBank, a Japanese tech investor with a penchant for risky bets, most of which are private, announced that its flagship funds had lost $33 billion over the past 12 months.

Although they were destined to reach the moon no matter what, cryptocurrencies are also falling apart. Even some hardened hodlers got cold feet. On May 12, bitcoin, the largest cryptocurrency, was trading below $26,000, less than half of its early November peak. Other digital currencies lost even more value. The next four largest coins have lost over 70% since their peak. Non-fungible tokens (NFTs), even more speculative securities of digital assets such as art that can be traded, were also hammered. NFT sales of ether, another major cryptocurrency, have more than halved in recent weeks on OpenSea, a major NFT marketplace.

The industry suffered from a sharp turnaround, says Mark Mahaney of Evercore ISI, an investment bank. In recent years, more than one factor has given technology a boost: the coronavirus pandemic has pushed living and working online; government stimulus programs have further increased demand; and super accommodative monetary policy has made long-term tech growth more attractive to investors. Now people are turning away from screens and leaving the house again; the war in Ukraine creates crippling uncertainty; and economies around the world are suffering from inflation and soon, perhaps, recession.

Then there is the rise in interest rates. In addition to potentially triggering a downturn, they reduce the present value of tech company earnings, most of which lie far in the future. If inflation does not come down, central banks will pile on further rate hikes, putting further pressure on risky tech stocks.

How bad will things go? Although stock markets have stabilized a bit in recent days, no one is ready to hit bottom. Just as markets have overshot in recent years, they can undervalue. There’s more than one consensus on what might happen once the dust settles. According to Daniel Ives of Wedbush, another investment bank, the tech industry is at a “fork”. As interest rates rise, he argues, investors will turn away from more speculative growth stocks and focus on quality names in technology.

No prizes for guessing which ones. Although the combined market value of the US tech titans – Alphabet, Amazon, Apple, Meta and Microsoft – has fallen nearly 25% since November and their latest results were less stellar than in previous quarters, they remain sure values. Together, they posted $359 billion in quarterly sales and $69 billion in net profit. Their core businesses are still growing, especially cloud computing. Combined, Alphabet, Amazon and Microsoft, the world’s three largest cloud providers, made $43 billion in sales for these services in the first three months of 2022, up 33% from a year earlier. .

More unexpectedly, older tech and hardware stocks look in good shape, Ives notes. Intel, a veteran chipmaker, is down a relatively modest 13% since November. IBM, a software icon, is up 12%. Enterprise software makers with stable sales and high margins, such as Adobe, Oracle and Salesforce, could rebound quickly. As difficult as that may seem given the May 11 Coinbase crash, so are payments and crypto platforms, which have joined the mainstream of finance. Cybersecurity companies, such as CrowdStrike or Palo Alto Networks, could see their fortunes return thanks to fears of Russian and Chinese cyberattacks. Geopolitical divisions could even lift Palantir, a secret analytics firm that works with security services, whose share price fell 20% on May 9 after revealing slowing sales growth.

A favorite pastime in Silicon Valley, right after the invention of the next big thing, is bubble detection.

Craig Ruttle/AP

A favorite pastime in Silicon Valley, right after the invention of the next big thing, is bubble detection.

Businesses in the consistently unprofitable gig economy seem more fragile. Uber, the ride-hailing and delivery champion that reported on May 4 that trips and users grew nearly a fifth year-on-year in the first quarter, still lost nearly $6 billion. The steep repricing of video streamers, with multi-billion dollar content spend and reverse (Netflix) or even steady (Disney) subscriber growth, may be permanent. The same may be true for second-tier companies in areas such as social media (Snap) or e-commerce (Shopify), which are dominated by Meta and Amazon respectively.

It would be wrong to compare the current technological crisis to the bursting of the Internet bubble two decades ago. Back then, companies had neither healthy balance sheets nor promising business models. These days, many of them have both. The stomach-turning market swings are unpleasant for a generation of founders, workers, and tech investors who have been through a long bull run. But they are unlikely to stop digital technology from devouring the world.

© 2022 The Economist Newspaper Limited. All rights reserved. Excerpt from The Economist published under licence. The original article can be found at www.economist.com

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