Dot-com Bubble 2.0

Technology companies that dominated and outperformed throughout the past decade and during the pandemic see their shares plummet in 2022. These companies include Meta ($FB), Amazon ($AMZN), Apple ($AAPL), Netflix ($NFLX) and Alphabet ($GOOGL), also collectively known as FAANG.

On average, the "FAANG" shares have been down roughly 40 percent since the start of the year. At the same time, the tech-heavy NASDAQ-100 portfolio is down by 27 percent since the beginning of the year.

In addition to Big Tech, promising start-ups such as Robinhood and Zoom, which thrilled the investors during the pandemic, have also seen mounting losses.

The recent fall of tech stocks has left market watchers, such as analysts and investors wondering - what happened?

The great fall of 2021: The beginning of the end

On November 17, 2021, the NASDAQ Composite hit its all-time high. Analysts wondered whether the investors were throwing money at every start-up or whether these companies must have something exciting going on. Simultaneously, multiple start-ups raised funding at unicorn valuations while having less than $10 million in annual recurring revenue (ARR). 

It all went downhill from there, and in late 2021 and early 2022, we entered a period where the private markets tried to gauge whether the downturn would be permanent. By then, many investors felt like the companies were truly overvalued. 

Since then, the NASDAQ composite has been down by 27 percent relative to the beginning of the year. We're now moving towards a consensus that the downturn is permanent. 

Compared to the beginning of the year: 

- Meta / Facebook ($FB) is down by 42 percent

- Apple ($AAPL) is down by 14 percent

- Asana ($ASAN) is down by 80 percent

- Netflix ($NFLX) is down by 71 percent

- Snowflake ($SNOW) is down by 58 percent

Several investment firms like Dragoneer, D1 and Coatue have slowed or halted their late-stage private investing. Investors are also advising tech companies to slow down or freeze hiring. 

Layoffs are here

Firms such as Carvana, Zwift and Netflix are letting people go, while Facebook, Twitter, Cameo, Wayfair, Redfin, MainStreet and Bolt are imposing hiring freezes.

Many companies that recently raised funds are letting people go. Pollen, a UK-based travel and entertainment technology company that raised $150M in Series C, is laying off 200 employees weeks after raising funds. About 20 of these people were in tech and included senior engineers, managers and delivery roles. Multiple reports indicate that companies are handling layoffs poorly, and morale is low inside these companies.

While some experts argue that the tech sector is oversold, the tech companies may have the odds stacked against them due to macroeconomic headwinds.

Macroeconomic headwinds

Even though the pandemic is over, the post-pandemic macroeconomic headwinds, such as high inflation, snarled supply chains, and slow economic growth, are hammering the tech stocks. Furthermore, the surprise invasion of Ukraine by Russia has been a critical headwind for the tech stocks.

Some tech analysts report that this is the most complex macro backdrop in 100 years. While this isn't great news for stocks in general, the tech shares are facing even more headwinds due to the highly speculative risks that come with it. 

Many investors are shifting to "safe-haven assets" to protect their portfolios, as evidenced by the soaring demand for gold and the outperformance of value stocks in the first quarter of 2022. World Gold Council reports that the demand for Gold in Q1 2022 increased by 34 percent compared to Q1 of 2021. The significant gold price and demand drivers were the Ukraine invasion and surging inflation.

A recession may be around the corner

Wall Street is predicting a recession in 2023. Federal Reserve recently raised interest rates to combat inflation, which directly impacted the value of tech stocks.

The Fed held interest rates near zero throughout the pandemic and leaned into a policy called Quantitative Easing (QE), which enabled the recovery from the pandemic-induced downturn. At the same time, it also boosted risk assets like the tech stocks. 

The policies set by the Fed, from the near-zero interest rates and quantitative easing (QE), thrived under the loose monetary policies. The central bank injected liquidity into the economy as a lending measure, which laid out a safety net for the investors chasing all kinds of risk assets, such as tech stocks. Many people refer to it as the "free money" era. 

The end of the "free money" era

In March 2022, the Fed raised its benchmark interest rate for the first time since 2018 to tackle inflation. The markets immediately started to experience what Wall Street watchers called a "regime change". The first week of May ultimately ended the "free money" era.

Now that the "free money" era is over, tech investors are worried that we could be seeing a Dot-com Bubble. Some analysts believe this might not be a Dot-com Bubble 2.0; instead, it's a massive overcorrection. As part of the overcorrection, many techs and EV players will go away or consolidate.

Course correction

Tech stocks are sensitive to rising interest rates to the discounted cash flow (DCF) model used to value equities. DCF models forecast the future cash flow of a company to calculate its present value. The key factor used in the discounting process is the interest rates. 

As the interest rates go up, the present value of a company's future earnings goes down. The more significant the expected growth of future earnings, the worse the impact of rising interest rates is on a stock's valuation.

Tech companies valued highly due to their growth potential would face the highest impact. Technology companies eschew profitability to invest in future growth. 

The future of tech stocks might not look not optimistic. However, many believe large tech companies such as FAANG are driven by "organic business growth", and that's something they can still provide.