Griffin on Tech: The fear index: A reality check for the tech dreamers

Peter Griffin, Editor. 28 January 2022, 2:32 pm

The Nasdaq entered correction territory this week, a number of big-name tech stocks suffered large drops in value, while the crypto market remained in bearish territory.

Those two words starting with ‘i’ – interest and inflation have spooked markets in general but taken a bigger toll on tech-related stocks and digital assets, which have been on an upward trajectory during the pandemic.

So why the reversal in fortunes? It could be argued that most things tech-related have become overvalued in the last 12 – 18 months. I don’t like to use the term “bubble”, the memories of the Dotcom crash are still etched into my brain. But it is clear that people have been paying over the odds for owning a slice of “disruptive” companies that are aiming to reinvent entire industries with innovation.

Yes, some of these companies changed how we shopped, worked, educated and entertained ourselves during the pandemic. Some of them may well transform transport, healthcare, space travel, cloud computing and Web3 in the course of the next decade. But 2021 has dawned with the realisation that for all of its disruptive potential, tech is still tethered to the ground by the things that determine the value of any other type of asset.

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Rising interest rates are not good for the stock market. When interest rates are low, people spend more and that’s good for the bottom line of listed companies, including tech companies. It equates to more Netflix subscriptions and iPhone and Tesla sales. When interest rates rise, people tighten their belts and put more into interest-yielding term deposits and less into equities.

The US Federal Reserve indicated this week that it will look to raise interest rates in March for the first time since the start of the pandemic. It will do so to try and curb the other ‘i’ – inflation, which is gathering momentum in the US and other countries including our own (5.9% inflation in the last year). 

Inflation, or rising prices, eats into consumers’ spending power. It means fewer groceries in the basket for the same dollars spent and reduced revenue for companies, which is bad for the economy. Inflation isn’t all bad, some companies that sell goods and services that are in high demand will profit from it. But for high-growth, high-risk tech stocks, inflation is not a good thing as those who invest in it have other, lower-risk options to make a return on their money, such as those interest-generating term deposits. 

Flight from risk

The pandemic, we were told, represented a surge in digital transformation that has put most organisations well on the way to becoming ‘digital-first’. But the flight from risk we are seeing is separating the tech companies that are delivering value during this digital transformation, from those that are promising big things for the future, but have big hurdles to overcome in delivering them.

The poster child for the latter category is US investor Cathie Wood’s Ark Innovation ETF (exchange-traded fund) which is down in value 29% since the start of the year and 50% from a year ago.

The fund makes a point of taking holdings in companies its managers think are truly disruptive, including Tesla, which makes up nearly 10% of the fund’s holdings and without which the decline in value would have been even greater. Both Microsoft and Google have had modest share values falls so far this year – each around 11%, which reflects the fact that they are still solidly growing now and have huge disruptive potential for the future. 

The riskier ventures that have seen 30 or 40% declines, may well still succeed and now represent good buys. Tesla (down 22%) has already singlehandedly created the electric car market and expects major growth this year despite the lingering effects of supply chain disruption. But investors will likely take a much closer look at the financial fundamentals and risk profile of high-growth tech companies this year. That’s not a bad thing. 

Shake out coming

We are living in the age of exponential growth and disruptive technology. I’m as optimistic as ever about technology’s role in improving our lives and taking better care of the planet.

But market corrections serve a useful purpose. They take the heat out of the market, curtail the hype and encourage everyone to focus on what really matters. There will be a shake-out this year, particularly in the over-inflated crypto space. Many currencies and blockchain projects will disappear. But the tech companies that survive and thrive through 2022 have a much better chance of still being around a decade from now and disrupting the world the way their founders intended.

Source: ITP New Zealand Tech Blog

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