The reasons why the collapse of technology stocks may not be over

For anyone looking at the stock market to make a living, the recent car crash in technology stocks was mesmerizing. There are many reasons to believe that it is not over.

This is not so much a problem for Big Tech, although the wealth wiped out since the beginning of the year is significant. Among them, the five largest technology companies have lost nearly $ 2.6 trillion. That’s a 26 percent drop, twice the Dow Jones Industrial Average.

There are still serious questions. Amazon is undergoing an unusually severe adjustment after huge costs, while the problems facing Meta, while the former Facebook is trying to reposition itself as a company with a metaverse, are a little less than existential. But overall, Big Tech’s advantage over the rest of the market has largely faded, and companies’ defenses are likely to show up in tough economic times.

The ax hangs rather over high-tech technology companies. This is where the estimates have become the most stretched and where the market has the most problems finding its lowest value. As investors look for more appropriate financial criteria to judge these companies, as well as the right valuation ratios to apply to these indicators, volatility is likely to remain high.

Numerous earnings were a favorite that growing investors used to pursue higher stocks, at least until last November’s turnaround. Under this measure, there is enough room for further declines, especially as markets often exceed both on the way down and on the way up.

Zoom is now trading at less than six times this year’s expected sales, far from a revenue multiplier of more than 85 that peaked in 2020. But Tomasz Tunguz of Redpoint Ventures estimated this week that even after a nearly 70% drop, cloud software companies are still trading a 50% premium over the multiple revenue-to-revenue they were in 2017.

Revenue growth is also rapidly falling out of favor as investors try to assess the resilience of companies set up for growth, but face financial shock and a potential economic downturn. Both investors and technology leaders are beginning to deviate from two favorite profit measures that have emerged among technology investors with a boom in the market – profit before interest, taxes, depreciation and amortization; and net profits, which exclude the cost of stock compensation.

Dara Khosrovshahi, CEO of Uber, told the staff in the shipping company this week that in a harsher financial climate it is time to abandon the company’s ebitda goals and turn it into a positive cash flow. After burning nearly $ 18 billion since 2016, he is fortunate that Uber was on the verge of reaching this stage – although a new focus on costs will be needed to make it a sustainable profit from the measure. Many other technology companies, accustomed to ready-made money delivery in good times, are still far from reaching the stage of free cash flow.

Meanwhile, the distribution of limited staff has become a free way for many companies to find talent in the hot labor market without compromising the revenue measures to which Wall Street pays the most attention. Workers began to view stock compensation as a guaranteed supplement to their regular income, rather than the lottery option it once had. Like Dan Loeb from Third Point wrote to its investors this week, which will force companies to either raise cash wages to keep workers happy, or to issue many more shares, something that will dilute existing shareholders but will not be obvious to anyone still considering non-GAAP measures for profits.

Meanwhile, there are many other companies that do not have any profits by any measure and very little in the way of sales, which makes it even more difficult for the market to find a bottom.

Manufacturer of electric trucks Rivian reached a stock market value of $ 91 billion at the time of last year’s IPO, although it sold only a handful of vehicles. After sinking 80 percent, Rivian may have found a kind of floor: on Wednesday it traded at almost exactly its book value, thanks to $ 15 billion in net money on its balance sheet. This proved to be a good basis for a 14% rebound on Thursday, after the company reported profits.

Many companies in this position do not have the kind of balance sheet to return to. This is especially true for Spacs, or special purpose funding mechanisms that have been used for the public presentation of companies at an early stage. As the escape from risk continues, even today stressful assessments may seem overly optimistic.

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