4 min read.Updated: 10 May 2022, 10:35 PM ISTParmy Olson, Bloomberg
The sector’s equity boom has given way to valuation doubt in 2022
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In the two decades since the dotcom crash, investors in the US have been bracing themselves for another bubble to burst. Yet year after year, tech firms like Facebook and Alphabet kept expanding while investors kept the faith that this would go on. Even the financial crisis of 2008 barely registered as a blip. But now there is serious talk among entrepreneurs and investors that a feared correction could happen.
Given how well technology is woven into our lives—and what it has in store—the broader tech boom of the past two decades seems set to continue for long. But investors must navigate the novelty of uncertainty. Already the Nasdaq 100 has declined about 23% since November 2021. That is as steep a drop as it experienced in March 2020 with the onset of covid. If it slides a couple percentage points more, that’ll mark its biggest decline ever in a single year. So-called FAANG stocks, including Facebook parent Meta Platforms, Apple, Amazon, Netflix and Google, had on Friday lost about $2 trillion in value since the start of 2022.
Note that markets have never seen a transition from a pandemic that kept people at home. They have no reference point. Now companies and investors are trying to process an explosion of pent-up demand, as consumers have rushed out to buy things and for ‘revenge travel’. As companies hurt most by the pandemic see their fortunes swing back up, tech’s lockdown darlings are suffering from a reassessment of value that arguably looks overdone for some. Take Spotify. On Friday, its shares were trading at a low of $105, down 57% in 2022 despite just reporting its biggest growth in profit in the last quarter and 15% annual growth in subscribers to 182 million. Zoom has lost 45% of its value since the start of the year, 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 patchily 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 Motor Company? 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 broad macro-economic 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 realize his metaverse ambitions. Little wonder the company is treading more cautiously into the metaverse now, having also said it will invest less than planned in virtual reality.
SPACs (remember them?) meanwhile seem to have declined in number, leading to far fewer late-stage exits for tech companies so far this year. Sneer as much as you like at ‘blank cheque’ backers of companies that really had no business going public, but they likely helped stave off the tech market correction we are now witnessing for at least half a year or more.
With many SPAC investors burnt by misadventures, venture capitalists might also be poised to rein in their activity in private markets. One venture capital investor in London said it had seen three different funding deals for tech startups, worth about $5 million each, collapse in the past few of weeks. “These were deals that would have happened three years ago," he said, requesting anonymity because of his involvement in founding a new stealth startup. “Everyone is battening down the hatches."
Layoffs, which history tells us tend to snowball across an industry, are cropping up among tech startups and newly public tech firms: Celebrity shoutout app Cameo said last week that it was cutting nearly 90 jobs; the week before, US fintech darling Robinhood Markets said it would cut about 9% of its 3,400-person workforce.
Chances are the current declines aren’t over, 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.
Equity investors must now contend with an unfamiliar era of doubt for tech, while venture capital funds shore up cash to ride out the next couple of years. Startups will have to do the same. It will be painful, but it won’t last forever.
Parmy Olson is a Bloomberg Opinion columnist covering technology.