The once high-flying tech sector has suffered a strong sell-off this year on fears that the sector’s growth could be dampened by rising interest rates. The tech-heavy Nasdaq Composite is down more than 14%.
Chris Hondros | Journalists | Getty Images
A lot has changed in technology since the dot-com boom and bust.
But one thing remained. When the economy turns, investors flock to the exits. Despite a furious rally on Thursday, the tech-laden Nasdaq finished in the red for a fourth consecutive quarter, marking the longest such streak since the dot-bomb era of 2000-2001. The only other negative stretch of four quarters in the Nasdaq’s five-story of the decade was in 1983-84, when the The video game market has collapsed.
This year marks the first time the Nasdaq has fallen every four quarters. It fell 9.1% in the first three months of the year, followed by a 22% drop in the second quarter and a 4.1% decline in the third quarter. It fell 1% in the fourth quarter following an 8.7% drop in December.
For the full year, the Nasdaq slid 33%, its biggest drop since 2008 and the third-worst year on record. The decline of 14 years ago came during the financial crisis caused by the housing crisis.
“It’s really hard to be positive about technology right now,” Gene Munster, managing partner of Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You feel like you’re missing something. You feel like you don’t get the joke.”
Other than 2008, the only other worst year for the Nasdaq was 2000, when the dot-com bubble burst and the index fell 39%. The early dreams of the Internet taking over the world have faded. Pets.com, infamous for the sock puppet, went public in February of that year and to close nine months later. EToys, which held its IPO in 1999 and saw its market cap reach nearly $8 billion, sunk in 2000, losing most of its value before going bankrupt early the following year. Delivery company Kozmo.com never started its IPO, filed in March 2000 and withdraw its offer August.
Amazon had its worst year in 2000, with an 80% drop. Cisco fell 29%, then another 53% the following year. Microsoft fell by more than 60% and Apple by more than 70%.
The parallels with today are quite obvious.
In 2022, the company formerly known as Facebook has lost about two-thirds of its value as investors balked to a future in the Metaverse. You’re here fell by a similar amount as the automaker has long been valued as a tech company crashed into reality. Amazon fall A half.
the IPO market this year was non-existent, but many of the companies that went public last year at astronomical valuations lost 80% or more of their value.
Perhaps the closest analogy to 2000 was the crypto market this year. Digital currencies Bitcoin and ether plunged more than 60%. Over $2 trillion in value has been wiped out as speculators fled crypto. Many companies have gone bankrupt, including crypto exchange FTX, which collapsed after hitting a $32 billion valuation earlier in the year. Founder Sam Bankman-Fried now faces criminal fraud charges.
The only major Nasdaq-listed crypto company is Coinbase, which went public last year. In 2022, its shares fell 86%, wiping out more than $45 billion in market capitalization. In total, Nasdaq companies have lost nearly $9 trillion this year, according to FactSet.
At its peak in 2000, Nasdaq companies were worth about $6.6 trillion in total, and lost about $5 trillion by the time the market bottomed in October 2002.
Despite the similarities, things are different today.
For the most part, the 2022 meltdown was less about businesses disappearing overnight and more about investors and executives waking up to reality.
Companies are downsizing and reassess itself after a decade of growth fueled by cheap money. With the Fed raising rates to try to control inflation, investors shifted their focus from unprofitable rapid growth to demand for cash generation.
“If you just look at future cash flow without profitability, these are the companies that did very well in 2020, and those are not as defensible today,” said Shannon Saccocia, Chief Investment Officer of SVB Private, at CNBC’s “Closing Bell: Overtime” on Tuesday. “The tech is dead narrative is likely in place for the next two quarters,” Saccocia said, adding that parts of the industry “will have light at the end of this tunnel”.
The tunnel she describes is the continuation of rate hikes by the Fed, which can only end if the economy goes into recession. Either scenario is troubling for much of tech, which tends to thrive when the economy is in growth mode.
In mid-December, the The Fed lifted its benchmark interest rate at its highest in 15 years, bringing it to a target range of 4.25% to 4.5%. The rate was anchored near zero during the pandemic as well as in the years following the financial crisis.
Chamath Palihapitiya, technology investor told CNBC at the end of October, that more than a decade of zero interest rates “has perverted the market” and “allowed follies and asset bubbles to develop in every sector of the economy”.
Palihapitiya has benefited as much as anyone from the cheap money available, pioneering investments in special purpose acquisition companies (SPACs), blank check entities that seek companies to take public through a merger reversed.
With no yield available on fixed income and with technology attracting stratospheric valuations, SPACs took off, breeding more than $160 billion on U.S. exchanges in 2021, nearly double the previous year, according to data from PSPC Research. That figure has dropped to $13.4 billion this year. CNBC Post-SPAC indexcomposed of the largest companies that debuted via SPACs in the past two years, lost two-thirds of its value in 2022.
SPACs fell in 2022
Predicting a bottom, as all investors know, is a wild ride. No two crises are the same, and the economy has changed dramatically since the housing crash of 2008 and even more so since the dot-com crash of 2000.
But few market forecasters expect a big rebound in 2023. Loup’s Munster said its fund held 50% cash, adding that “if we thought we were at the bottom, we would roll out today.”
Duncan Davidson, founding partner of venture capital firm Bullpen Capital, also expects more pain. He looks back to the dot-com era, when it took two years and seven months to go from peak to trough. On Friday, it was just over 13 months since the Nasdaq hit its all-time high.
For private equity investors, in 2023, “I think we’re going to see a lot of good deals taking over companies,” said Davidson, who got into tech investing in the 1980s. to get to the bottom of the market, “we have maybe two years to go,” he said.