By Daniel Newman
The Nasdaq Composite Index’s rebound after seven weeks of losses restored some faith in technology stocks. After all, more than half of Nasdaq-member companies were until recently down 50% or more from the late-2021 highs.
Pundits and analysts have pointed to the Federal Reserve’s previous ultra-dovish policy, global pandemic, broken supply chains and wild speculation as having inflated corporate valuations and asset bubbles that needed to be popped.
Perhaps the highlight of the exuberance in this period was the runaway valuations given to “earningsless” tech companies that de-SPAC’d and IPO’d — in many cases seeing features becoming publicly traded companies and poor- to modest-performing tech names with no profits trading at exorbitant revenue multiples.
Some tech names have seen valuations fall more than 75% from their pandemic-fueled highs. Companies including Zoom /zigman2/quotes/211319643/composite ZM +0.16% , Peloton /zigman2/quotes/208035743/composite PTON -6.94% , Twilio /zigman2/quotes/205796518/composite TWLO -0.45% , Snap /zigman2/quotes/205087158/composite SNAP -0.37% and Roku /zigman2/quotes/205087179/composite ROKU -3.77% , to name a few.
We have heard some analysts go as far as to compare the current market to the “dot-bomb” crash of 2000. That’s a clever comparison for headlines, but it lacks any basis despite the massive declines during both periods.
Nope, it’s not the dot-bomb crash all over again
Before we look further into the prospects for technology and the critical role it stands to play in the subsequent recovery, it is worthwhile to take a moment to contrast the “dot bomb” crash from today’s tech environment.
While a handful of low-quality tech companies went public over the past few years, I believe the only significant commonality is the trillions of dollars of wealth that have been wiped out over the past several months and during the 2000 crash.
In the dot-bomb era, investors threw money at companies with no significant product or track record of revenue or path to profits. Many were just “dot com” versions of physical retailers selling toys, pet supplies or also-ran internet search companies. Of the 457 IPOs in 1999, 117 saw their share prices surge more than 100% on the first trading day. When the Nasdaq finally bottomed around October 2000, the Nasdaq had lost 78% of its value, and a large swath of companies would fail in the months to follow.
In this downturn, many of the companies mentioned with significant share-price declines, such as Zoom and Twilio, are still showing considerable revenue growth and profits. There’s an argument that the pandemic rapidly pulled growth forward and shot share prices up artificially, but the underlying companies are real businesses with customers, growth and, in many cases, profitability — a stark contrast to the wake of the dot-bomb era.
We must ‘tech’ our way out
Over the past several weeks, I have had an opportunity to sit down with the CEOs of many tech companies, including Marvell /zigman2/quotes/200053236/composite MRVL +0.95% , Dell /zigman2/quotes/203822527/composite DELL +3.57% , IBM /zigman2/quotes/203856914/composite IBM +1.82% , Intel /zigman2/quotes/203649727/composite INTC -2.18% , SAP /zigman2/quotes/207905606/composite SAP +1.81% , Hewlett Packard Enterprise /zigman2/quotes/201998588/composite HPE +2.41% and Five9 /zigman2/quotes/209043265/composite FIVN +1.34% . I have made a point to ask each of them about current macro conditions — inflation, war, interest rates, tight labor markets, supply chains, etc. Of course, all CEOs are paying careful attention to the macro environment, but a key theme has emerged in conversations:
Technology will provide the key ingredients to solving many of the challenges.
While Cathie Wood hasn’t been very popular among investors in the wake of the Ark Innovation Fund /zigman2/quotes/204808965/composite ARKK -1.19% falling more than 70% from its all-time highs, her thesis of the longer-term impact of technologies being the answer to many of the world’s most considerable challenges in health care, finance, cybersecurity and climate has merit.
In other words, automation, cloud, software as a service (SaaS), artificial intelligence (AI), communication and 5G will optimize businesses, reduce the risk of fraud and cybercrime, automate menial tasks and improve workflows, and enable innovation through higher throughput and lower latency connectivity. The supply chain will require diversifying manufacturing and utilizing big data and AI to optimize material sourcing, product assembly, shipping data and more.
The companies that enable these technologies will be paramount to the future, and the associated equities should find footing sooner than later as this becomes increasingly evident.
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PTON
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