A favorite pastime in Silicon Valley, second only to the invention of the next new thing, is bubble spotting. Even industry insiders tend to get these things startlingly wrong. “You’ll see some dead unicorns this year,” prominent venture capitalist Bill Gurley predicted in 2015, the year he has already begun incubating these US$1 billion (NZ$1.6 billion) startups.
The game has become much easier: the sound of bubbles can be heard everywhere. Technology stocks, initial public offerings (IPOs), blank checking companies (known as SPACs), startup valuations and even cryptocurrencies: all assets that have rocketed to dizzying heights over the past few years are now on the ground. It’s hard to say how loud they could explode – and which ones might.
The most exciting was the decline in tech stocks. The NDXT, the index of the 100 largest technology companies on the Nasdaq, has fallen by a third since its peak in early November. Companies in this index collectively lost $2.8 trillion in market capitalization.
The hugely successful startups that have gone public in recent years have also been hit hard. Robinhood shares are down 80% from where the retail app was launched to the public in July 2021. Shares of Peloton, which makes internet-connected exercise bikes, have lost more than 90% of their value since their peak. As a group, the largest of the newly listed companies are 38% less than they were at the beginning of the year.
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No wonder IPOS has dried up. From January to April 2021, about 150 companies went public in America, most of them technical. This year only 30 have done so. The boom in SPACs, which go public and then find a startup to merge with, has faded. Of the more than 1,000 such companies that have floated in America since 2018, only a third have merged with Target. Many of the bargains have lost their luster. According to an index that tracks the 25 largest vehicles far apart, they have lost 56% of their value since the beginning of the year.
As tech stocks collapse, they are dragging private company valuations with them. CB Insights, a research firm, believes 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 deals was down 5% compared to the previous quarter. The amount of capital invested fell by 19%, the largest quarterly decline since 2012. Notable investors in the one-century boom were stunned. On May 12 SoftBank, a Japanese tech investor leaning on risky bets, mostly private, reported that its flagship funds have lost $33 billion in the past 12 months.
Although they were supposed to make it to the moon no matter what, cryptocurrencies are also on the rise. Even some ruthless “pranksters” are getting cold. On May 12, bitcoin, the largest cryptocurrency, was trading at less than $26,000, less than half of its peak in early November. Other digital money has lost even more value. The next four biggest coins have lost more than 70% since their peak. Non-fungible tokens (NFTs), and even more speculative titles for digital assets like art that can be traded, are also coming up. Sales of NFTs in the ether, another major cryptocurrency, have more than halved in recent weeks on OpenSea, a major NFT marketplace.
The industry has suffered a sudden reversal of fortunes, explains 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 life and work online; Government stimulus programs have increased demand; Ultra-loose monetary policy has made long-term technology 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 experiencing inflation, and may soon stagnate.
Then there is the rise in interest rates. Besides the possibility of an economic downturn, they reduce the present value of tech companies’ profits, most of which fall far into the future. If inflation doesn’t go down, central banks will pile on more price increases, putting more pressure on risky tech stocks.
How bad are things? Although the stock markets have stabilized a bit in recent days, no one is ready to call the bottom. Just as the markets have outgrown the past few years, they can fall behind on target. There is more consensus on what can happen when the dust settles. According to Daniel Ives of Wedbush, another investment bank, the tech industry is at a “crossroads”. With interest rates rising, he argues, investors will turn their backs on more speculative growth stocks and focus on high-quality names in technology.
There are no prizes to guess which one. Although the combined market capitalization of America’s tech giants – Alphabet, Amazon, Apple, Meta and Microsoft – has fallen nearly 25% since November and their recent results are less good than in previous quarters, they remain safe bets. Together, they booked $359 billion in quarterly sales and $69 billion in net profit. Their core business is still growing – particularly cloud computing. Collectively, Alphabet, Amazon and Microsoft, the world’s three largest cloud service providers, earned $43 billion in sales of these services in the first three months of 2022, up 33% from the previous year.
Unexpectedly, the stock of older technology and hardware appears to be doing well, Ives notes. Intel, the veteran chipmaker, has fallen a relatively modest 13 percent since November. IBM, a software icon, is up 12%. Business software makers with steady sales and high margins, such as Adobe, Oracle and Salesforce, may rebound quickly. Although it may seem difficult given the collapse of Coinbase on May 11, payments and crypto platforms may also have joined the financial mainstream. Cybersecurity companies, such as CrowdStrike or Palo Alto Networks, could see their fortunes return thanks to fears of Russian and Chinese cyber attacks. Geopolitical divisions may drive Palantir, a classified analytics firm that works with security services, whose share price fell 20% on May 9 after revealing slowing sales growth.
The constantly unprofitable temporary jobs economy companies look more shaky. Uber, the delivery and ride-sharing champion that reported on May 4 that rides and users rose nearly five years year-over-year in the first quarter, is still losing nearly $6 billion. Massive video player repricing, with multibillion-dollar content expenditures 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 a mistake to compare the current tech stagnation with the bursting of the dot-com bubble two decades ago. At the time, companies had neither good budgets nor promising business models. Nowadays many of them have both. The turbulent market volatility is unpleasant for a generation of tech founders, workers and investors who have lived through a long period of bullishness. But digital technology is unlikely to stop eating the world.
© 2022 The Economist Newspaper Limited. All rights reserved. From The Economist, published under license. The original article can be found at www.economist.com