Tech Stock Crash: Dot-Com Bubble 2.0?
Is the stock market experiencing another dot-com bubble? Many analysts sure believe so, with some of the most popular tech stocks like Grab, Shopee and Zoom suffering deep losses and trading low.
The current outlook for tech stocks is worrying to say the least. The tech-focused Nasdaq has slumped more than 20% since its last peak in November 2021, as The Smart Investor co-founder David Kuo writes for Channel News Asia. The U.S. market in general isn’t doing so well, with the S&P 500 also down 19% since January. Kuo says only 131 of the 500 counters have managed a positive performance since the start of the year.
Much of the recent decline reportedly has to do with extended selloff of tech stocks propelled by concerns over aggressive actions by the U.S. Federal Reserve to fight inflation, which has reached its highest levels in over 40 years. The Fed has kicked up interest rates in an effort to reduce its US$9 trillion balance sheet and take back control of prices. But such moves can scare investors out of borrowing money and investing it, which, of course, paints a bad picture for the economy.
Add to that how Wall Street seems to be losing confidence in the tech sector, leading many companies to lose the steam they once had in their respective initial public offerings. A lot of tech companies thrived during the pandemic when almost everyone was forced to adopt digital means of communication, education and shopping in their daily lives. Now, however, with restrictions easing and businesses opening back up, the time spent at home and on these tech platforms is significantly less, leading to potential losses in revenue.
The popular video conferencing software Zoom, for instance, is now trading at less than six times of expected sales, a dramatic downturn from its performance at the height of the pandemic in 2020. Exercise startup Peloton is similarly seeing its stock valuation plummet from US$163 at the end of 2020 to about US$17 today. Across different services and offerings, from e-commerce to social media, almost all tech companies, including Big Tech, could have a rocky financial year ahead if nothing changes soon.
Tech stocks have been on the decline for about seven weeks now, the longest it has been since the dot-com bubble from two decades ago, which is seemingly bringing back bad memories for veteran investors and analysts. During that period, many investors were willing to bet – and they were willing to bet big – on the prospect of the Internet changing how people went about their daily activities. As a result, tech stocks, which were believed would challenge established businesses despite still being unprofitable, sold gangbusters in Wall Street. But almost as soon as word got out that these companies were banking on an unproven idea, their valuations plummeted. A good example of which is Pets.com, an online pet supplies store that went from being traded for US$14 after its initial public offering to just US$0.22 nine months later. The company would go bankrupt and liquidate its assets in November 2000.
Are today’s tech companies doomed to suffer the same fate? Kuo notes that the situation hasn’t reached that stage yet, though there are similarities between modern tech companies and the companies of the dot-com era. Both of which, he said, faced rising interest rates, pressure from inflation and excessive liquidity, among other economic problems. What sets today’s tech companies apart, however, is they actually have a business plan, rather than a mere idea.
Even Singapore-based companies are similarly weathering the challenges of the market.
The tech conglomerate Sea Limited, which is popular for its Garena gaming platform and ownership of e-commerce platform Shopee, was valued at 21 times its annual sales in 2020. This value then dropped to 12 times its annual revenue in 2021. And now, the company is only trading at US$3.30 for every dollar of its 2021 revenue.
Grab Holdings, meanwhile, is in the same boat. The ride-hailing company had a strong start in Wall Street, reaching a valuation that was more than 100 times its annual revenue. That then fell to about 40 times in 2021 and later slipped further to just 11 times its revenue this year.
While the market is not in a good place right now, it doesn’t mean these companies can’t eventually rally and recoup their losses. Kuo notes how Amazon managed to survive the dot-com crash and come out as an internet juggernaut today thanks to its ability to generate cash flow. The e-commerce company, which previously only sold books, managed to raise US$672 million in cash just months prior to the stock market meltdown. It also had a robust business model that gave it the ability to collect money from its customers before its suppliers had to be paid, giving it more leverage to work out more favourable payment terms.
Despite it not being spared from today’s market crash, Amazon, according to Kuo, is on the right track. Each of today’s tech companies, he emphasises, should have cash generation as their top priority. Instead of worrying about their share prices, they must be patient and focus on finding ways to keep money coming in. Because at the end of the day, its cash that will help them survive and capitalise on opportunities to expand.
The current outlook for tech stocks is worrying to say the least, with tech-focused Nasdaq slumping more than 20% since its last peak in November 2021.
Much of the recent decline reportedly has to do with extended selloff of tech stocks propelled by concerns over aggressive actions by the U.S. Federal Reserve to fight inflation, which has reached its highest levels in over 40 years.
Add to that how Wall Street seems to be losing confidence in the tech sector, leading many companies to lose the steam they once had in their respective initial public offerings.
This has led many analysts to wonder if another dot-com crash is on the horizon of today's tech companies.