The once-high-flying tech sector has endured a heavy sell-off this year amid fears that the industry’s growth could be curbed 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 dotcom boom and bust.
But one thing has remained. When the economy turns, investors rush for the exits. Despite a furious rally on Thursday, the tech-laden Nasdaq finished in the red for the fourth consecutive quarter, marking the longest run of such a run since the dot-bomb period of 2000 to 2001. The decade of history was in 1983-84, when the video game market crashed.
This year marks the first time the Nasdaq has fallen all four quarters. It fell 9.1% in the first three months of the year, followed by a 22% plunge in the second quarter and a 4.1% drop in the third quarter. It was down 1% in the fourth quarter from an 8.7% decline in December.
For the full year, the Nasdaq was down 33%, its sharpest drop since 2008 and the third-worst year on record. The decline 14 years ago came during the financial crisis due to the housing crisis.
“It’s very 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 year that was worse for the Nasdaq was 2000, when the dot-com bubble burst and the index fell 39%. Early dreams that the internet would take over the world evaporated. Pets.com, infamous for the sock puppet, went public in February of that year shut down nine months later. EToys, which went public in 1999 and saw its market capitalization grow to nearly $8 billion, sank in 2000, which loses almost all of its value before going bankrupt early next year. Delivery company Kozmo.com never got off the ground, submitted in March 2000 and withdrawing his offer August.
Amazon had its worst year ever in 2000, down 80%. Cisco fell by 29% and another 53% the following year. Microsoft plummeted by more than 60% and Apple by more than 70%.
The parallels with today are quite large.
In 2022, the company formerly known as Facebook lost about two-thirds of its value as investors turned off to a future in the metaverse. Tesla fell by a similar amount, as the automaker has long valued as a technology company bumped into reality. Amazon dropped with half.
The IPO market this year didn’t exist, but many of the companies that went public last year at astronomical valuations lost 80% or more of their value.
Perhaps the best analogy to 2000 was the crypto market this year. Digital Currencies Bitcoin and ether decreased by more than 60%. More than $2 trillion in value wiped out as speculators fled crypto. Numerous companies went bankrupt, most notably crypto exchange FTX, which collapsed after reaching a valuation of $32 billion earlier this year. Founder Sam Bankman-Fried is now facing allegations of criminal fraud.
The only major crypto company traded on the Nasdaq is Coin base, which went public last year. In 2022, shares fell 86%, eliminating more than $45 billion in market cap. Overall, Nasdaq companies have lost nearly $9 trillion in value this year, according to FactSet.
At its peak in 2000, Nasdaq companies totaled about $6.6 trillion, and by the time the market bottomed out in October 2002, they lost about $5 trillion.
Despite the similarities, things are different today.
For the most part, the collapse of 2022 wasn’t so much about companies disappearing overnight, but more about investors and executives waking up to reality.
Companies are reduce and being revalued after a decade of growth fueled by cheap money. With the Fed raising rates to try and control inflation, investors have stopped putting a premium on rapid unprofitable growth and started demanding cash generation.
“If you just look at future cash flows without profitability, those are the companies that did really well in 2020, and those aren’t as defensible today,” Shannon Saccocia, chief investment officer of SVB Private, told CNBC’s “Closing Bell: Overtime” on Tuesday. “The tech is dead narrative is likely to be in place for the next couple of quarters,” Saccocia said, adding that some parts of the industry “will have light at the end of this tunnel.”
The tunnel she describes is the continued rate hikes by the Fed, which may only stop if the economy goes into recession. Both scenarios are troubling for much of the technology, which tends to thrive when the economy is in growth mode.
Mid-December is the Fed raised its benchmark rate to the highest in 15 years, lifting it to a target range of 4.25% to 4.5%. The rate was anchored near zero during the pandemic and 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 “perverted the market” and “allowed manias and bubbles to form in every part of the economy.”
Palihapitiya benefited as much as anyone from the available cheap money, pioneering investments in Special Purpose Acquisition Companies (SPACs), blank check entities that hunt companies to go public through a reverse merger.
With no returns available in fixed income and technology attracting stratospheric valuations, SPACs took off. to increase more than $160 billion in US exchanges in 2021, almost double the previous year, according to data from SPAC investigation. That number fell to $13.4 billion this year. CNBCs Post-SPAC indexmade up of the largest companies launched through SPACs in the past two years, lost two-thirds of its value by 2022.
SPACs fell in 2022
Predicting a bottom, as all investors know, is a fool’s errand. No two crises are the same, and the economy has changed dramatically since the housing collapse in 2008 and even more so since the dotcom crash in 2000.
But few market forecasters expect a major uptick in 2023. Loup’s Munster said his fund is 50% cash, adding that “if we thought we were at the bottom, we would bet today.”
Duncan Davidson, founder of venture capital firm Bullpen Capital, also expects more pain ahead. He looks at the dotcom era, when it took two years and seven months to go from peak to trough. Friday marks just over 13 months since the Nasdaq hit its all-time high.
For private equity investors, “I think we’re going to see a lot of bargains popping up in corporate basements in 2023,” said Davidson, who started investing in technology in the 1980s. To get to the bottom of the market, “we may have two more years to go,” he said.