Fall of tech stocks
Is the tech boom over?
What has led to the recent crash in the stock prices of the biggest tech companies around the world?
2022 is already off to a bad start if you bet big on tech companies. There was a sudden trend of all major stocks descending into lows that nobody would have anticipated. That too in that short of a timeframe. The major descent began after Meta recorded one of the biggest losses in its history after the daily active users of the site fell to 1.929 billion from 1.930 billion in just three months. Meta has never seen its user base go into reverse, all of this comes after the brand revamped its image and introduced the idea of the metaverse that some people are still trying to wrap their heads around. Tech-dominated nations such as the United States and India have witnessed the stock prices of the top-tier companies drop to record lows. But why is this happening, is meta the only reason? Let us take a look. In short, no. This is not just because of Meta; the company has a role to play but it is very small. The major issue is of out-of-the-earth valuations. To understand that, let me introduce you to this term, valuation. Valuation in its true sense means the estimated worth of something. If you are familiar with Shark Tank, then you will have definitely come across this term. Valuation for publicly traded companies is done by multiplying the stock price by the number of outstanding shares. Sounds simple right? Here is the catch, it is not public companies that are driving the fall in stock prices, it is the private companies. Private companies are legally not required to publish their financials to the general public. With virtually no track record of a private entity’s finances, how can you list it on a stock exchange? How do you accurately determine their value? Private companies are not bound by stringent regulations imposed by the financial regulators such as SEC and SEBI. In order to calculate the correct value of a private company, there a ton of metrics such as price-earnings ratio, price-sales ratio, and so on which are fairly complex and not needed to know. Basically, think of it as the owners and stakeholders in the private company can claim a set value or give the image of massive success in the public sphere without having to let anyone take a look at their books.
When the public investors look at the performance and popularity of these companies from the outside, they all want a piece of it. Private companies will eventually go public as they need funds to expand and improve their profits. What happened in the last year was there were a record number of IPO’s with valuations exceeding one another. The companies list and reach record highs during listing.
What happens as time goes on and they do not perform as expected? This does not mean they are performing bad but that they were expected to do better but they end up performing just fairly. Now add this and combine it with slowing economic growth globally, tightened monetary policy from the Federal Reserve of the United States, increasing inflation and interest rates. Voila! You have a recipe for disaster.
Consider Paytm and Zomato, two of India’s biggest IPO’s last year. The shares of the companies are currently trading 10-30% below the listing price. This has largely been due to market selloffs. The market has largely been overvalued across all major economies which has resulted in such a boom. No company has been safe from it with the exception of a handful. This does not mark the end of the run of tech stocks in any way, they will bounce back, and they will do so in a big way. But it will take longer than you anticipate, and it will not be smooth, as due to policy changes there are a lot of humps between the current price levels and the expected price levels.