The once high-tech sector has seen a sharp sell-off this year amid concerns that the sector’s growth could be limited by rising interest rates. The technology-heavy Nasdaq Composite is down more than 14%.
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Much has changed in technology since the dot-com boom and bust.
The Internet became mobile. The data center went to the cloud. Cars now drive themselves. Chatbots have gotten pretty smart.
But one thing remains. When the economy turns, investors rush for the exits. Despite a furious rally on Thursday, the tech-heavy Nasdaq finished in the red for a fourth straight quarter, marking the longest such streak since the dot-bomb period of 2000 to 2001[ads1]. The only other negative four-quarter stretch in the Nasdaq’s the five-decade history was in 1983-84, when the video game market crashed.
This year is the first time the Nasdaq has fallen in all four quarters. It fell 9.1% in the first three months of the year, followed by a second quarter drop of 22% and a third quarter decline of 4.1%. It fell 1% in the fourth quarter due to an 8.7% decline in December.
For the full year, the Nasdaq fell 33%, its steepest decline since 2008 and its third-worst year on record. The decline 14 years ago came during the economic collapse caused by the housing crisis.
“It’s very hard to be bullish on technology right now,” Gene Munster, managing partner at Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You feel like you’re missing out. You feel like you don’t get the joke.”
Other than 2008, the only other year was worse for the Nasdaq 2000, when the dot-com bubble burst and the index fell 39%. Early dreams of the Internet taking over the world evaporated. Pets.com, infamous for its sock puppet, went public in February of that year and shut down nine months later. EToys, which went public in 1999 and saw its market capitalization grow to nearly $8 billion, tanked in 2000, losing almost all of its value before filing for bankruptcy early the next year. Delivery company Kozmo.com never got around to going public, filing in March 2000 and withdrawing its offer in August.
Amazon had its worst year ever in 2000, with an 80% drop. Cisco fell 29% and then another 53% the next year. Microsoft fell by more than 60% and Apple by over 70%.
The parallels to today are quite strong.
In 2022, the company was formerly known as Facebook lost about two-thirds of its value as investors staked a future in the metaverse. Tesla fell by a similar amount, as the automaker long valued as a technology company crashed into reality. Amazon fell by 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 fell by more than 60%. Over $2 trillion in value was wiped out as speculators fled crypto. Numerous companies went bankrupt, most notably crypto exchange FTX, which collapsed after reaching a value of $32 billion earlier this year. Founder Sam Bankman-Fried is now facing criminal fraud charges.
The only major crypto company traded on Nasdaq is Coin base, which went public last year. In 2022, shares fell 86%, eliminating more than $45 billion in market capitalization. In total, Nasdaq companies have shed nearly $9 trillion in value this year, according to FactSet.
At its peak in 2000, Nasdaq companies were worth about $6.6 trillion in total, and continued to lose about $5 trillion of that when the market bottomed out in October 2002.
Do not fight the feed
Despite the similarities, things are different today.
For the most part, the collapse of 2022 was less about businesses disappearing overnight and more about investors and executives waking up to reality.
Companies are downsizing and being revalued after a decade of growth fueled by cheap money. With the Fed raising interest rates to try to get inflation under control, investors have stopped putting a premium on rapid unprofitable growth and started demanding cash generation.
“If you look solely at future cash flows without profitability, there are companies that did very well in 2020 and they’re not as sound today,” Shannon Saccocia, chief investment officer at SVB Private, told CNBC’s “Closing Bell: Overtime” on Tuesday. “The technology is dead, the narrative is probably in place for the next couple of quarters,” Saccocia said, adding that some parts of the sector “will have light at the end of this tunnel.”
The tunnel she describes is the continued rate hikes by the Fed, which can only end if the economy goes into recession. Both scenarios are troubling for much of tech, which tends to thrive when the economy is in growth mode.
In mid-December, the Fed raised its benchmark interest rate to a 15-year high, lifting it to a target range of 4.25% to 4.5%. The rate was anchored 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 “perverted the market” and “allowed manias and asset bubbles to build up in every part of the economy.”
Palihapitiya took as much advantage as some of the cheap money available, 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 interest and with technology attracting stratospheric valuations, SPACs took off and raised more than $160 billion on U.S. exchanges in 2021, nearly double the previous year, according to data from SPAC Research. This figure dropped to $13.4 billion this year. CNBC Post-SPAC Indexwhich consists of the largest companies that have debuted via SPACs in the past two years, lost two-thirds of their value in 2022.
SPACs Declined in 2022
“Routed basement” shopping
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 of 2008 and even more so since the dot-com crash of 2000.
But few market forecasts expect much of a bounce back in 2023. Loups Munster said his fund is 50% cash, adding that “if we thought we were at the bottom, we would be distributing today.”
Duncan Davidson, founder of venture firm Bullpen Capital, also expects more pain 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 has been just over 13 months since the Nasdaq set its record price.
For private equity investors, by 2023, “I think we’re going to see a lot of the basement spewing out of companies,” said Davidson, who got his start in technology investing in the 1980s. To get to the bottom of the market, “we may have two years left,” he said.
SEE: The IPO market is as bad as it was in 2001