At what point does the slump in US technology stocks stop being dismissed as a mere “tech wreck” primarily centred on the most speculative companies and become considered a fully-fledged dotcom crash 2.0?
The combination of increasingly hawkish central banks and Russia’s invasion of Ukraine has been toxic for equity markets this year. The MSCI All-Country World index is now down 12 per cent in 2022. However, as is often the case, headline indices miss a more fascinating story underneath.
The pain has been primarily focused in US technology stocks. Despite a tepid bounce over the past week, the Nasdaq Composite index has already fallen nearly 20 per cent in 2022. In dollar terms, the tech-heavy market has now lost well over $5tn in value since its November peak — more than the Nasdaq’s dollar losses through the entire dotcom bubble unwinding in 2000-02.
Yes, the index is vastly bigger these days, But the scale of wealth destruction — and how painful it has been for many investors — is real and arguably under-appreciated, as the relative resilience of Big Tech is obscuring the extent of the damage.
Almost two-thirds of the Nasdaq’s 3,000 plus members have fallen by at least 25 per cent from their 52-week highs, according to numbers from Société Générale’s Andrew Lapthorne. Almost 43 per cent have lost more than half their value, and nearly a fifth have tumbled over 75 per cent — the worst such ratio since the financial crisis. The $5.15tn that has evaporated from the Nasdaq in recent weeks is like the entire UK stock market going “poof”.
In many cases, these tumbles started last year and have been particularly brutal in speculative, often unprofitable technology stocks. That initially led many analysts and investors to dismiss the declines as a “spec tech wreck” triggered by the prospect of tighter monetary policy and rising bond yields.
Interest rates have an almost mechanistic impact on how many investors value so-called growth stocks. The more distant a company’s profits, the greater the adverse impact of rising rates on valuations. For companies that are sustained more by dreams than cash flows, 2022 has been a nightmare. For those that scoffed at the last two years of excesses in markets, it has felt like sweet vindication.
Aside from Meta’s market meltdown after Facebook’s results disappointed investors, the senior ranks of the tech hierarchy have performed better than the broader Nasdaq. Unlike the eyeball metrics of the dotcom bubble, the cash churned out by the technology industry over the past decade is no mirage. And sentiment is now so sour that it is tempting to think that a turnround is due. Fund managers surveyed by Bank of America are now “underweight” tech stocks for the first time since December 2008.
However, anyone taking shelter in Big Tech should not kid themselves. It is too soon to declare the end of the current tech rout. Goldman Sachs recently estimated that if the Federal Reserve decides to tighten monetary policy forcefully to damp inflation then the Nasdaq could tumble another 17 per cent.
Moreover, Meta’s 2022 slide is an example of how violent the market’s punishment can be if Big Tech starts disappointing on the fundamentals. Even a slowing of growth can lead to an abrupt regime change. Cisco is a cautionary tale from the last big bubble burst. Although the company’s earnings have quadrupled since the beginning of 2000, its stock has never regained its dotcom peak.
Similarly, venture capitalists or hedge funds that have flooded into early-stage, unlisted tech companies in recent years should not feel too smug about the illusory lack of volatility in private markets.
Private valuations cannot be divorced from public ones forever. Baillie Gifford’s Scottish Mortgage Trust marked down the value of its private investments by an average of 9.1 per cent in January. Unless there is a powerful snapback soon, dreaded “down rounds” — where private companies take in fresh money at lower valuations than in previous slugs of financing — will become far more common.
Slower, more circumspect investment rounds will also dent return calculations, dimming the allure of venture capital after a decade of astonishing investor demand. That might trigger a feedback loop of more down rounds, eroding returns and making investors warier.
This is not yet another dotcom bust and it may never become one. But the scale of wealth destruction is already enormous. The wider reverberations are still unknowable, and could be significant.