The once high-flying tech sector has suffered a heavy sell-off this year amid concerns that the sector’s growth could be capped by rising interest rates. The tech-heavy Nasdaq Composite is down more than 14%.
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A lot has changed in technology since the dot-com boom and bust.
Mobile Internet. The data center has moved to the cloud. Cars now self-driving. Chatbot received pretty smart.
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But one thing remains. As the economy turned, investors rushed to find exits. Despite a ferocious rally on Thursday, the tech-filled Nasdaq ended in the red for the fourth straight quarter, marking the longest such streak since the blockbuster period from 2000 to 2001. The only other negative 4-quarter period in Nasdaq’s 5 quarters -the historic decade was in 1983-84, when The video game market collapsed.
This year marks the first time Nasdaq has lost all four quarters. It fell 9.1% in the first three months of the year, followed by a 22% decline in the second quarter and a decline in the third quarter of 4.1%. It fell 1% in the fourth quarter due to an 8.7% drop in December.
For the full year, the Nasdaq slipped 33%, its biggest drop since 2008 and the third worst year on record. The drop 14 years ago occurred during the financial crisis caused by the housing crisis.
Gene Munster, managing partner at Loup Ventures, told CNBC’s Brian Sullivan on Wednesday: “It’s hard to be optimistic about technology right now. “You feel like you’re missing something. You feel like you don’t get the joke.”
Outside of 2008, the only worse year for the Nasdaq was 2000, when the dot-com bubble burst and the index fell 39%. Early dreams of the internet taking over the world have gone up in smoke. Pets.com, famous for its sock puppets, went public in February of that year and Turn off nine months later. EToys, which held an IPO in 1999 and saw its market capitalization grow to nearly $8 billion, sunk in 2000, which lost most of its value before going bankrupt early next year. Delivery company Kozmo.com never had a successful IPO, filed in March 2000 and withdrew its offer in August.
Amazon had its worst year ever in 2000, down 80%. Cisco down 29% and then 53% the following year. Microsoft plummeted more than 60% and Apple more than 70%.
The similarities with today are quite obvious.
In 2022, the company formerly known as Facebook loses about two-thirds of its value as investors falter in a future in the metaverse. Tesla decrease by a similar amount, as the automaker has long been valued as a technology company fall into reality. Amazon reduction half.
The IPO market This year doesn’t exist, but many companies that went public last year with astronomical valuations have lost 80% or more of their value.
Perhaps the closest analogy to 2000 is this year’s crypto market. digital currency Bitcoin and ether more than 60% drop. More than 2 trillion dollars in value has been delete when speculators run away from cryptocurrencies. Many companies have gone bankrupt, most notably crypto exchange FTX, fall after hitting a valuation of $32 billion at the start of the year. Founder Sam Bankman-Fried Now Faces criminal fraud.
The only major crypto company traded on Nasdaq is Coinbase, made public last year. In 2022, its shares fell 86%, removing more than $45 billion in market capitalization. In total, Nasdaq companies have lost nearly $9 trillion in value this year, according to FactSet.
At its peak in 2000, Nasdaq’s companies were worth about $6.6 trillion and went on to lose about $5 trillion of that by the time the market bottomed out in October. 2002.
Don’t fight the one who is being fed
Despite the similarities, things are different today.
For the most part, the fall of 2022 has less to do with businesses disappearing overnight and more to do with investors and executives waking up to reality.
Companies are reduce payroll and revalued after a decade of cheap money growth. With the Fed raising interest rates to try to control inflation, investors stopped appreciating the unprofitable rapid growth and started demanding cash generation.
Shannon Saccocia, chief investment officer of SVB Private, said: “If you only look at future cash flows without taking into account profits, those are the companies that have performed very well in 2020 and those companies. undefendable today.” Overtime” on Tuesday. “The story of dead technology will probably emerge in the next few quarters,” adding that some parts of the industry “will have light at the end. this tunnel”.
The tunnel she describes is the Fed continuing to raise interest rates, which can only end if the economy enters a recession. Both scenarios pose a problem for most technology, which tends to thrive when the economy is in growth mode.
In mid-December, Fed up its benchmark interest rate to a 15-year high, raising it to a target range of 4.25% to 4.5%. This ratio has been fixed near zero throughout the pandemic as well as in the years following the financial crisis.
Tech investor Chamath Palihapitiya told CNBC in late October that more than a decade of zero interest rates had “damaged markets” and “facilitating manias and asset bubbles to form in every part of the economy.”
Palihapitiya has taken full advantage of anyone with the cheap money available, pioneering investments in special purpose acquisition companies (SPACs), drum-checking organizations hunting for companies to publicly listed through a reverse merger.
There was no return in fixed income and with technology that attracted stratospheric valuation, SPAC succeeded, advanced over $160 billion on U.S. exchanges by 2021, nearly double from the previous year, according to data from SPAC . Research. That number has dropped to $13.4 billion this year. by CNBC Index after SPACincluding the largest companies that have launched through SPAC in the past two years, have lost two-thirds of their value by 2022.
SPAC declines in 2022
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Shopping for ‘bargain basements’
Predicting the bottom, as all investors know, is stupid. No two crises are alike, and the economy has changed dramatically since the 2008 housing crash and even more so since the 2000 dot-com crash.
But some market forecasters are counting on a bounce back in 2023. Loup’s Munster said his fund is holding 50% cash, adding that “if we think we’re on it, we’re going to be doing it.” at the bottom, we launched today.”
Duncan Davidson, founding partner of venture capital firm Bullpen Capital, also expects more difficulties ahead. He looks at the dot-com era, when it took two years and seven months to go from top to bottom. As of Friday, it’s been more than 13 months since the Nasdaq hit a record price.
For private equity investors, in 2023, “I think we’re going to see a lot of bargain companies that are attracting companies,” said Davidson, who is starting to invest in technology in those areas. 1980, said. “It could take us two years to bottom out,” he said.
