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[                    ]
Business | Pop!

Tech bubbles are bursting all over the place

Some more loudly than others

[20220514_w][20220514_w]
May 14th 2022
Share

A FAVOURITE PASTIME in Silicon Valley, second only to inventing the
next new thing, is bubble-spotting. Even industry insiders tend to
get these things spectacularly wrong. "You'll see some dead unicorns
this year," Bill Gurley, a noted venture capitalist, predicted in
2015, the year that incubation of these startups worth more than $1bn
really got going.

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The game has just become much easier: the sound of bubbles popping
can be heard all over the place. Tech shares, initial public
offerings (IPOs), blank-cheque companies (known as SPACs), startup
valuations and even cryptocurrencies: all the assets that climbed to
dizzying heights over the past few years are now coming down to
earth. It is harder to say how loudly they will burst--and which might
still reflate.

The decline of tech shares is the most spectacular. The NDXT, the
index of the 100 largest tech firms on the Nasdaq exchange, is down
by a third since its peak in early November. Firms in this index have
lost a combined $2.8trn in market value.

[20220514_w]

High-flying startups that went public in recent years have been hit
hard, too. The shares of Robinhood are 80% below the level at which
the retail-trading app went public in July 2021. Those of Peloton,
which makes internet-connected exercise bikes, have lost over 90% of
their value from their peak. As a group, the largest newly listed
firms are worth 38% less than at the start of the year (see chart).

Small wonder that IPOs have dried up. From January to April 2021 some
150 companies went public in America, most of them techie. This year
only 30 have done so. The boom in SPACs, which go public and then
find a startup with which to merge, has imploded. Of the more than
1,000 such firms that have floated in America since 2018, only a
third have merged with a target. Many of those that have done deals
have lost their shine. According to an index that tracks the 25
largest de- SPACed vehicles, they have lost 56% of their value since
the beginning of the year.

As tech shares crash, they are pulling valuations of private firms
down with them. CB Insights, a research firm, reckons that tech
startups raised $628bn globally in 2021 in more than 34,000 deals.
Between January and March this year the number of transactions fell
by 5% compared with the previous quarter. The amount of capital
invested dropped by 19%, the biggest quarterly decline since 2012.
The unicorn boom's superstar investors have been walloped. On May
12th SoftBank, a Japanese tech investor with a penchant for risky
bets, most of which are private, reported that its flagship funds
lost an eye-watering $33bn in the past 12 months.

[20220514_w]

Although they were meant to reach the Moon no matter what,
cryptocurrencies are also coming a cropper. Even some hardened
"hodlers" have been getting cold feet. On May 12th bitcoin, the
largest cryptocurrency, was trading below $26,000, less than half its
peak in early November. Other digital monies have shed even more
value. The next four biggest coins have lost more than 70% since
their peak. Non-fungible tokens (NFTs), even more speculative titles
to digital assets such as art that can be traded, have been hammered,
too. Sales of NFTs in ether, another big cryptocurrency, have dropped
by more than half in recent weeks on OpenSea, a big NFT marketplace.

The industry has suffered from an abrupt reversal of fortunes,
explains Mark Mahaney of Evercore ISI, an investment bank. In recent
years more than one factor gave tech a boost: the coronavirus
pandemic pushed life and work online; government stimulus programmes
further increased demand; and super-loose monetary policy made tech's
long-term growth more attractive to investors. Now people are turning
away from screens and leaving home again; the war in Ukraine is
creating paralysing uncertainty; and economies around the world are
suffering from inflation and soon, perhaps, recession.

[20220514_w]

Then there are rising interest rates. Besides possibly triggering a
downturn, they reduce the present value of tech companies' profits,
most of which lie far in the future. If inflation does not come down,
central banks will pile on more rate rises, putting further pressure
on risky tech stocks.

How bad will things get? Although stockmarkets have stabilised a bit
in recent days, no one is ready to call the bottom. Just as markets
have overshot in the past few years, they can undershoot. There is
more of a consensus over what could happen when the dust has settled.
According to Daniel Ives of Wedbush, another investment bank, the
tech industry is at a "fork in the road". As interest rates go up, he
argues, investors will turn their back on more speculative growth
stocks and focus on the quality names in tech.

No prizes for guessing which ones. Although the combined market value
of America's tech titans--Alphabet, Amazon, Apple, Meta and
Microsoft--has dropped by nearly 25% since November and their latest
results were less stellar than in earlier quarters, they remain safe
bets. Together they booked $359bn in quarterly sales and $69bn in net
profits. Their core businesses are still growing--in particular cloud
computing. Collectively, Alphabet, Amazon and Microsoft, the world's
three biggest cloud providers, took in $43bn of sales for such
services in the first three months of 2022, up by 33% from a year
earlier.

More unexpectedly, older tech and hardware stocks seem in decent
nick, Mr Ives notes. Intel, a veteran chipmaker, is down by a
relatively modest 13% since November. IBM, a software icon, is up by
12%. Makers of business software with steady sales and high margins,
such as Adobe, Oracle and Salesforce, may rebound fast. Hard though
it may seem given Coinbase's crash on May 11th, so may payments and
crypto platforms, which have joined the financial mainstream.
Cyber-security firms, such as CrowdStrike or Palo Alto Networks,
could see their fortunes return thanks to fears of Russian and
Chinese cyber-attacks. Geopolitical rifts may even lift Palantir, a
secretive analytics firm that works with security services, whose
share price plunged by 20% on May 9th after it disclosed slowing
sales growth.

Persistently unprofitable gig-economy firms look shakier. Uber, the
ride-hailing and delivery champion which reported on May 4th that
trips and users rose by nearly a fifth year on year in the first
quarter, still lost nearly $6bn. The heavy repricing of
video-streamers, with multibillion-dollar content expenses and
reversing (Netflix) or even steady (Disney) subscriber growth, may be
permanent. The same may be true for second-tier firms 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 tech slump to the bursting
of the dotcom bubble two decades ago. Back then companies had neither
healthy balance-sheets nor promising business models. Nowadays many
of them have both. The stomach-churning market gyrations are
unpleasant to a generation of tech founders, workers and investors
who have lived a long bull run. But they are unlikely to stop digital
technology eating the world. #

For more expert analysis of the biggest stories in economics,
business and markets, sign up to Money Talks, our weekly newsletter.

This article appeared in the Business section of the print edition
under the headline "Pop!"

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